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What Does it Mean to Default on Student Loans?

August 18, 2019

By Caroline Farhat

 

If you’re currently making student loan payments on time each month, great job! Paying back student loans can feel stressful at times, but the more you get it under control now, the better you’ll be in the long run. If you’ve accidentally forgotten a payment or two, or are afraid you may miss a payment soon, we understand life happens. You may have heard of defaulting on student loans, but what does it really mean and how can you avoid it? Keep reading to learn more. 

  

What Does it Mean to Default on Student Loan Debt?

When you do not make payments on your student loan debt for a specified period of time your loan is in default. For federal student loans, if your loans are not in deferment or forbearance and you do not make payments for 270-360 days the loan will be in default. If you have private student loans the length of time is less. Generally, 120 days without payment on a private loan and the loan is considered in default. Be sure to check your loan agreement for specific terms on when a loan is considered in default. 

 

To find out whether you have any federal student loans in default you can log in to your My Federal Student Aid account. There you can find information regarding all federal loans you have, along with the servicer and the status of the loan. For information on any private loans and federal loans, you can pull your free credit report yearly to see if you have any defaulted loans reported there.   

 

Consequences of Default on Student Loans

A default on a student loan, whether it’s a federal or private loan, can have severe consequences. However, some consequences only apply to federal loans. If you default on a student loan you could be facing: 

  • Collection – Your loan may be sent to a collection agency for payment. You will also incur late fees. This can apply to federal and private loans. 
  • Lawsuit – You can be sued by your loan provider for payment.  
  • Garnishment – For federal loans, your wages from your employer or Social Security payments you receive can be garnished to pay your loans. For private loans, the garnishment of your wages can be ordered through a lawsuit. 
  • Tax refunds intercepted – State and federal tax refunds can be intercepted to pay for federal student loans. 
  • Negative credit history – For most federal student loans a default will remain on your credit history for 7 years, although Perkins loans will remain until they are paid in full or consolidated. For private loans, generally, a default will remain for seven and a half years. Although a default may not remain on your credit history, the loan may still be in collections for payment. 
  • Negatively impact your credit score – Your credit score will be impacted as long as the default is showing on your credit history. In fact, you may see a drop in your score as early as 90 days after your missed payments, since missed payments are reported on your credit history.

A low credit score and negative credit history can make it difficult to obtain financing in the future for things such as a car loan or mortgage. It can also impact you if you are applying to rent an apartment or for certain jobs.  

 

How to Prevent Default

If you are having trouble making payments on your loan there are some options to consider to avoid a default:

 

1. Deferment or Forbearance

For federal loans, deferment or forbearance are good options when you have a temporary hardship making your payments. It’s important to know that with these options interest will continue to accrue on your loan in most circumstances. Forbearance can be done with some private loans but it is a shorter period of time than forbearance for federal loans.  

 

2. Refinance student loans

Both federal and private loans can be refinanced. When you refinance your student loan(s) you are obtaining a new loan to pay off your old loan(s). Refinancing student loans to a lower interest rate can reduce your monthly payment, as well as the amount you will pay for the loan in total. Refinancing can also be a great solution to combine multiple loans into one, so you only have to remember to make one student loan payment. 

 

If you are considering refinancing it’s best to apply before you miss any payments on your current loan because minimum credit requirements must be met in order to qualify. Although each lender is different, generally a credit score in the 600s is needed for refinancing, along with a low debt-to-loan ratio, and a minimum length of credit history. At ELFI a minimum credit score of 680 is required, along with a minimum credit history of 36 months.* 

 

3. Switch your repayment plan

If you have federal loans there are different repayment plans that allow you to make payments based on your income to make your payment more manageable. Income-Driven Repayment plans will extend the length of your loan but will reduce your monthly obligation. Look at the Federal Student Aid website to see all available repayment plans for federal loans.     

 

How to Fix a Default on Federal Student Loans

If you have defaulted on a student loan, it is most likely not feasible to pay the loan off in full to get the loan out of default. Therefore, there are other options to explore to get the loan out of default: 

 

1. Loan Rehabilitation

This is when you agree in writing to make nine payments within 10 consecutive months to your student loan provider. The payment amount required is calculated by your provider and is based on your discretionary income. Once you make the required nine payments within 10 months your loan is considered out of default. 

 

2. Loan Consolidation

With this option, you consolidate your defaulted loan(s) into a new Direct Consolidation Loan. In order to take advantage of this option, you must agree to pay the Direct Consolidation Loan on an Income-Driven Repayment plan or make three, full, on-time payments to your defaulted loan before you can consolidate.  

 

Bottom Line

Paying back your student loans can be a pain, but you have many options available to find the best repayment plan for you. As soon as you are having trouble making payments, seek out help so that you avoid missing or making late payments. 

 


 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

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Happy couple admiring their home
2020-10-22
Should I Build Home Equity or Pay Down Student Loans?

Owning a home is a goal for many people. In fact, 40% of young millennials are saving to buy a home. If you already own a home, congratulations on achieving your goal! If you are now faced with a mortgage and student loans, you may wonder which debt you should prioritize. Should you build home equity or pay down your student loans?    Here we will explain what home equity is, how to build it and when it’s better to focus on home equity or paying down student loans.   

What is Home Equity?

When you pay on a mortgage, even if you haven’t yet paid it off completely, you’re building equity in your home. Home equity is the dollar amount that you’ve invested in your home by making payments to your mortgage lender. Here’s an example of how to calculate it:  

How to Calculate Home Equity

  You can calculate your home equity by subtracting the balance of your mortgage from the current value of your home. The value of your home is determined by the fair market value of your house or the appraised value. This number is the true value of your asset (your house) since it takes into account the amount you owe on the loan.    Your home equity is calculated in your net worth. You may have heard that home equity can be “tapped into.” This means you can borrow against the equity of your home and use the money in a variety of ways. A home equity loan can cover home renovations or pay off higher-interest debt.    Your home is valued at $375,000 and your mortgage balance is $275,000. You determine the equity by taking the value of $375,000 and subtracting the mortgage balance of $275,000. The equity in your home is $100,000.   

Home Equity and the Housing Market

  Every time you make a mortgage payment, you are building equity, because you’re paying down the principal on your loan. Your home’s equity also increases when its value rises. Although the value is determined primarily by the housing market, you can raise the value through home improvements.   Just as the value of your home can increase based on the market, however, it can also decrease based on the market. The only sure way to increase your home equity is by paying down your mortgage loan. The more of the loan you pay off, the more your equity increases.  

Building Home Equity vs. Paying Down Student Loans

  If you follow the normal payment schedule, you’ll increase your home equity slowly. If you make extra payments towards your mortgage, you can build equity faster. However, if you also have student loans, should you build home equity or pay down your student loans insead? Let’s take a look at some factors that can help determine the best course of action:   

Interest Rates

If either your mortgage or any student loan has a variable interest rate, you may want to focus on that loan first, because you are at risk that the rate can rise and leave you with a higher payment to make. In addition, if one of your loans has a much higher interest rate than the other, you may choose to focus on it first.  

Security

With student loans, in certain instances, if you are facing financial hardships you can temporarily suspend payments. Mortgages offer less flexibility with payments, therefore missing payments can result in foreclosure and losing your home.  

Loan Balances

If you have student loans with lower balances than your mortgage, you may be able to pay them off more quickly. Then, you can continue to build equity after paying down your student loan debt.   

Tax Implications

You may get a bigger tax break by building equity versus paying off student loans. However, this doesn’t apply to everyone. Interest paid on student loans is deductible, however, there is a cap on how much. As of 2020 the cap is $2,500. Your income must meet the requirements to be able to deduct this amount.    Interest paid on mortgages is also deductible, but only if you itemize your deductions. The mortgage interest deduction can be much higher than $2,500. If you itemize your taxes, paying more on your mortgage may be advantageous for you come tax time.   

Refinancing Your Student Loans With ELFI

If you don’t want to choose between building equity or paying off your student loans, then consider refinancing your student loans with ELFI. Use our student loan refinance calculator to see how much you may be able to save.   

The Bottom Line 

Each person’s financial goals and situation are unique, so you have to make the best decision for you. Hopefully, however, knowing more about both options and which is better in certain circumstances will help you make an informed decision.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.   *Subject to credit approval. Terms and conditions apply.
Current LIBOR Rate
2020-10-19
Current LIBOR Rate Update: October 2020

This blog provides the most current LIBOR rate data as of October 19, 2020, along with a brief overview of the meaning of LIBOR and how it applies to variable-rate student loans. For more information on how LIBOR affects variable rate loans, read our blog, LIBOR: What It Means for Student Loans.

 

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a money market interest rate that is considered to be the standard in the interbank Eurodollar market. In short, it is the rate at which international banks are willing to offer Eurodollar deposits to one another. Many variable rate loans and lines of credit, such as mortgages, credit cards, and student loans, base their interest rates on the LIBOR rate.

 

How LIBOR Affects Variable Rate Student Loans

If you have variable-rate student loans, changes to the LIBOR impact the interest rate you’ll pay on the loan throughout your repayment. Private student loans, including refinanced student loans, have interest rates that are tied to an index, such as LIBOR. But that’s not the rate you’ll pay. The lender also adds a margin that is based on your credit – the better your credit, the lower the margin. By adding the LIBOR rate to the margin along with any other fees or charges that may be included, you can determine your annual percentage rate (APR), which is the full cost a lender charges you per year for funds expressed as a percentage. Your APR is the actual amount you pay.

 

LIBOR Maturities

There are seven different maturities for LIBOR, including overnight, one week, one month, two months, three months, six months, and twelve months. The most commonly quoted rate is the three-month U.S. dollar rate. Some student loan companies, including ELFI, adjust their interest rates every quarter based on the three-month LIBOR rate.

 

Current 1 Month LIBOR Rate – October 2020

As of October 19, 2020, the 1 month LIBOR rate is 0.15%. If the lender sets their margin at 3%, your new rate would be 3.15% (0.15% + 3.00%=3.15%). 

 

Current 3 Month LIBOR Rate – October 2020

As of October 19, 2020, the 3 month LIBOR rate is 0.24%. If the lender sets their margin at 3%, your new rate would be 3.24% (0.24% + 3.00%=3.24%). 

 

Current 6 Month LIBOR Rate – October 2020

As of October 19, 2020, the 6 month LIBOR rate is 0.25%. If the lender sets their margin at 3%, your new rate would be 3.25% (0.25% + 3.00%=3.25%). 

 

Current 1 Year LIBOR Rate – October 2020

As of October 19, 2020, 2020, the 1 year LIBOR rate is 0.35%. If the lender sets their margin at 3%, your new rate would be 3.35% (0.35% + 3.00%=3.35%). 

 

Understanding LIBOR

If you are planning to refinance your student loans or take out a personal loan or line of credit, understanding how the LIBOR rate works can help you choose between a fixed or variable-rate loan. Keep in mind that ELFI has some of the lowest student loan refinancing rates available, and you can prequalify in minutes without affecting your credit score.* Keep up with the ELFI blog for monthly updates on the current 1 month, 3 month, 6 month, and 1 year LIBOR rate data.

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

Woman struggling with student loan refinancing misconceptions
2020-10-16
7 Common Student Loan Refinancing Misconceptions

Refinancing is kind of like leveling up. After months or even years of working hard to become debt-free, you then gain access to a higher tier of borrowing - better terms, a lower interest rate or a smaller monthly payment. Many people have misconceptions about student loan refinancing, however, which keep them from taking advantage of the benefits that student loan refinancing has to offer.   If you're new to borrowing, it's easy to get scared of changing anything about your loan repayment process - even if that means losing out on the money that refinancing can save you. Here are some of the most common student loan refinancing myths - and what you need to know instead.  

Refinancing Student Loans Takes Too Long

Don't fall prey to the misconception that student loan refinancing is a lengthy, tedious process. In fact, refinancing student loans is usually very straightforward. You fill out an application and wait a couple of days for the lender to run your credit report and verify your personal information. Once that’s been completed, you’ll be presented with the refinance offers you qualify for.   The total length of time from beginning to end should take a couple of weeks. This also depends on how quickly you respond to questions from the lender and provide any additional forms or information they request.  

Student Loan Refinancing Has Expensive Upfront Costs

Unlike mortgage refinancing, student loan refinancing has no upfront costs like application or origination fees. That’s also why there’s no downside to applying for a student loan refinancing multiple times.   Plus, most lenders don’t charge a prepayment penalty, which is a fee for repaying the loan ahead of schedule. The only fee you’ll pay is the stated interest rate. You may owe a late fee if you make a payment after the due date, but that can be avoided if you set up automatic payments.  

You Need a High Income to Refinance Student Loans

While some lenders require that borrowers have a high income to qualify for student loan refinancing, others are more lenient. All lenders, however, care about the debt-to-income (DTI) ratio, which is your monthly debt payments divided by your gross income. Most lenders want a DTI percentage below 50%.   To calculate your DTI, add up your monthly debt payments including mortgage, car loan, personal loan, credit card payment and any other loans. Include a rent payment if you don't own your property. Then, divide that total figure by your gross or pre-tax monthly income.   If your DTI is below 50%, then you’re likely a good student loan refinancing candidate. If it’s higher, then you need to increase your income, decrease your monthly housing payment or pay down some of your debts  

You Need a Perfect Credit Score to Refinance Student Loans

Another misconception about student loan refinancing is that you need an excellent credit score to qualify, but lenders often accept borrowers with credit scores as low as 660. This is great news for young borrowers who haven’t built a strong credit history yet, or who ran up some credit card debt in college.   What may hurt your chances of being approved are any recent late payments, bankruptcies, defaults, liens or recent applications for other loans or lines of credit. Before applying to refinance your student loans, check your official credit report at AnnualCreditReport.com.   About one in five people have a mistake on their credit report, which can lead to an application being denied. Look at your credit report from all three credit bureaus - Experian, Equifax and TransUnion - and make sure you recognize all the accounts.   If you notice a mistake, file a dispute directly with each of the credit bureaus. It may take a few weeks to have it removed from your credit report. Make sure to follow up and verify that it’s been deleted.   You can check your credit score for free through a bank or credit card provider, or a service like Credit Karma. If your score is 660 or higher, you can feel free to apply for student loan refinancing.   You can increase your shot of being approved by applying with a cosigner. A co-signer is someone who agrees to assume legal liability for your debt if you stop making payments and default. The loan will also show up on the cosigner’s credit report.   Even if you can be approved to refinance by yourself, you may receive lower interest rates if you apply with a cosigner.  

You Can Only Refinance Once

A common misconception is that you have only one opportunity to refinance your student loans. In reality, however, there’s no limit on how many times you can refinance. Many choose to refinance every time the Federal Reserve decreases interest rates because they can get a better deal on their student loans.   The only thing that might affect how often you can refinance is your credit score. If your credit dips below a certain threshold, then a lender may not approve your application. Also, you may be denied if you lose your job or your income drastically plummets.  

You Refinance All Your Student Loans

Many borrowers have a mix of federal and private student loans and assume they have to refinance all those loans at the same time.   But borrowers can choose to refinance the loans they want. They can keep their federal loans as they are and only refinance their private loans. If they have a private loan with a low interest rate and one with a high interest rate, they can choose to only refinance the latter.   In some cases, borrowers may have a better chance of being approved if they only refinance some of their loans instead of all of them.  

Student Loan Refinancing is a Confusing Process

When you apply to refinance with ELFI, you’ll be matched to a member of the Personal Loan Advisor team. Every time you call ELFI, you can speak to that same person. This minimizes the confusion and frustration involved with the refinancing process.   As of 10/19/2020, ELFI has a 4.9 rating on Trustpilot with more than 1,200 reviews. More than 90% of those are five-star reviews. ELFI also has an A+ rating from the Better Business Bureau.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.