The SALT Blog mashes up famous YouTube videos with money vocab to help you make sense of (and remember) financial terminology. Today, we’re looking at one of the scariest aspects of borrowing a student loan: default.
Let’s get a disclaimer out of the way: This post’s intention is not to trivialize student loan default. Default can be a crushing burden for many people—with some tragically unable to shoulder its weight.
Still, defaults continue to rise, and many people continue to suffer because of it. We want to help you avoid this situation altogether—so you don’t face a David-like primal urge to scream about your debt. And the best way (OK, more like “a way”) we can do that? With a little vidcabulary.
WHAT IS DEFAULT?
Student loans “default” when their payments reach more than a certain date past due. Different types of loans have different time frames, but most federal student loans enter default after 270 days.
If you end up in default, you’ll probably share David’s confusion after his dentist visit—as well as a couple of his questions: “Why is this happening to me?” and “Is this going to be forever?”
David probably won’t remember the answers he receives (or, at least, he wouldn’t have if his dad hadn’t broadcast this video to the world). But you don’t have anesthesia to blame for forgetting about default. So let’s tackle each question one at a time.
“WHY IS THIS HAPPENING TO ME?”
At a basic level, loans default for a single reason: You didn’t repay your debt as promised. Signing for a loan is the same as signing any contract—you enter a formal agreement to repay the money you borrow, plus interest.
However, there are many reasons why people actually reach this point, like:
- They didn’t know a payment was due.
- They couldn’t afford their payments.
- There was a mistake (yup, it can happen)—and they don’t actually owe money.
Options exist to help overcome these issues. Borrowers can find their loan data in NSLDS or their credit report. Prior to default, federal student loan borrowers can shrink their payments or postpone them altogether without penalty. And, if there was an error, there are certain circumstances in which debt can be reduced or discharged.
Ultimately, though, avoidance won’t help—no matter the issue you’re facing. Be like David: Pick at those stitches, and get to the bottom of what’s going on.
“IS THIS GOING TO BE FOREVER?”
No, although it may feel like it at first.
When someone defaults, their entire loan balance becomes due in full—and collection fees can be added to what they already owe. To retrieve this money, a loan holder may be able take Social Security, disability income, state and federal tax refunds, and up to 15% of the borrower’s paychecks.
However, there are options that relieve these consequences and pull federal student loans out of default:
- Paying it in full.
- Loan rehabilitation.
- Consolidating it.
Paying in full is the quickest way out of default, but it may not be practical for everyone. Rehabilitation and consolidation both get loans back on track, and there’s a lot to learn before deciding between the two. (Click here for a detailed explanation of these options.)
In the end, David probably didn’t know what he was in for when he went to the dentist. Don’t leave yourself in the same position. Refer to your loan’s promissory note to determine its default time frame.
Remember, seeing “David After Dentist” will be much more enjoyable than seeing “David After Default.”
Have an analogy that will help our readers remember what student loan default is? Share it in the comments.