If your student loans go into “collections,” it most likely means you will be bombarded with phone calls from debt collection agencies. Most commonly, student loans get sent to collections when a person defaults on their loan. Defaulting on a loan is serious business and can have a negative impact on your financial stability in many ways. However, if your student loans have already gone to collections, there are steps you can take to remedy the situation. Here is a quick guide to dealing with loans that have gone to collections and actions to take to protect your financial future.
What Does It Mean to Default on Your Loans?
Just because you choose to stop paying your student loans, doesn’t mean they go away. When student loans go unpaid, they can go into default. Federal loans typically go into default after 9 months of unpaid monthly payments; the time frame for default on private loans varies by lender but is usually less than the federal “grace period.” Because Americans collectively hold over $1.5 trillion in student loan debt, it’s no surprise that the average cohort default rate hovers around 11 percent.
When you default on your loans, the entire balance of your loan becomes due. At this point, most lenders will try to work with you to come up with an arrangement that is manageable. For example, a lender may help a borrower devise a solution that lowers their monthly payment. However, if no agreement is arranged, lenders typically send defaulted loan debt to a collection agency that will collect it for them.
Student Loan Collections
If your student loan debt is sent to a collections agency, they will do everything in their power to get you to pay the debt. Usually, a debt collector’s first approach is to try to work with you to devise a repayment plan you can handle. If this method is unsuccessful, they will usually pursue wage garnishment, which legally allows them to take a certain amount from a borrower’s paycheck and apply it toward their outstanding loan debt.
Once a wage garnishment is approved, you will no longer have control over your monthly payment. Therefore, it’s always best to try to come to an agreement with a debt collector in preliminary negotiations to ensure you’ll be able to make smaller payments each month.
The Consequences of Defaulted Loans Going to Collections
When your loans default and go into collections, it can initiate a series of consequences that can negatively impact your current and future financial stability.
For starters, if you default on federal student loans, you may lose access to federal loan repayment plans—such as forbearance, deferment, and income-driven repayment plans (IDRs)—that make the repayment process more manageable and affordable. These federal programs are great resources students can take advantage of to make paying off their loans easier.
Additionally, defaulting on your loans is likely to harm your credit score. When you default on your loan, your lender will report your missed payments to the three major credit bureaus, who will then likely lower your credit score. A poor credit score can make obtaining important loans in the future—such as for a house or car—difficult down the line, as many lenders will probably charge higher interest rates or flat out deny your application.
How Do I Get My Loans Out of Default?
If you default on your student loans, there are some actions you can take to recover. If you have federal student loans, you can still rehabilitate your loans in collections by making a series of consecutive on-time payments. Once you have made these voluntary, full payments on your defaulted loan, you can consolidate your federal loans into a single direct loan.
Direct consolidation loans combine all of your loans into one with a fixed interest rate that is usually the average of the interest rates on your previous loans before they were consolidated. Once you make consecutive on-time payments on the new direct loan, the loan can be fully rehabilitated and you can have the default removed from your record. When trying to deal with getting your loans out of default, it can be beneficial to seek guidance from a professional, such as a skilled student loan attorney.
Work with a Skilled Arizona Student Loan Lawyer to Get on Top of Your Student Loans
If you are struggling to make your monthly payments or are in over your head with student loan debt, you should seek professional guidance from a student loan attorney. While it can be overwhelming to feel like you cannot afford the minimum payment on your student loans, going into default or collections can have a serious impact on your credit score and financial stability. If you’re worried about defaulting on your loans, or if you already have, it’s important to take action as fast as you can. A student loan lawyer is a great resource for getting out of default and into a repayment plan that works for your financial situation.
At McCarthy Law, our attorneys are dedicated to helping students navigate the complexities of the student loan system. Under our student loan debt settlement program, our licensed attorneys negotiate with lenders to ensure our clients pay only a fraction of their original loan balance. To schedule a consultation with one of our skilled student loan settlement attorneys, call (855) 976-5777 or fill out our online contact form.