In a word, yes. Student loans are debts just like any other. If you fail to make your payments, you’ll go into default. Once you default, your loan servicer may sue you for collection. So, when can they sue and what will it mean for you?
Delinquency and Default
Some student loans are privately funded. For those loans, the rules are simple. Your loan contract will define the parameters of default. Some lenders may offer a grace period during which you can catch up on missed payments without consequences. Others may consider you to be in default as soon as you miss a payment. Once you default, the entire balance of your loan comes due immediately and your private student loan provider can sue you for collection.
The federal government funds most student loans. The rules governing federal student loans are somewhat more lenient than those governing private student loans. As soon as you miss a payment on your federal student loan, you’re considered to be “delinquent” on the loan. Delinquency will hit you hardest in the credit score – your servicer will report your delinquency to the three major credit bureaus after 90 days unless you make up the missed payments. That will make it harder for you to get a credit card, a cell phone plan, an apartment, a car, and anything else that requires a credit check.
After 270 days, your student loan will be in default. Up until that time, you’ll receive calls and letters requesting payment and explaining what will happen if you default on the loan. They can’t actually move against you until you’ve crossed the 270-day mark. Once you default, the entire balance of your loan will come due immediately and your loan servicer can sue you for collection and intercept your federal and state income tax refund and benefits. You’ll also lose eligibility for deferment or forbearance programs and you won’t be able to get any other federal student aid.
At any time up until you default, you can make up your missed payments and restore your loan to pre-delinquency or pre-default status. Even after you default, you can bring your loan back to pre-default status through one of several programs.
Getting Out of Default
For your private student loans, you can only get out of default and avoid a lawsuit by making up the missed payments during the grace period or by reaching an agreement with your lender. You should contact your lender as soon as you know you’ll be missing a payment to explain your situation. Your lender may be willing to work with you to lower your interest rate, lengthen the term of your loan, or forgive a missed payment.
Federal student loans come with more options for getting out of default. First, you can pay the balance of the loan in full. Up to 25% of the outstanding balance in collection costs will be added to your principal 120 days after default, making this option even more expensive the longer you wait. For most students, full repayment isn’t an option either way.
So, you can contact your loan servicer rehabilitate your loan. To rehabilitate a federal student loan, you must work with your loan servicer to determine a monthly payment that would be affordable to you and reasonable to the lender. Reasonable payments are generally about 1% of the outstanding balance of your loan, but may vary if you’re suffering from financial hardship. If you make 9 on-time (within 20 days of the due date) payments in a row, your loan will be considered “rehabilitated” and you’ll become eligible for additional aid. You and your loan servicer will sign a rehabilitation agreement and the loan servicer will sell your loan to another lender. With rehabilitation, up to 18.5% of the outstanding balance of your loan in collection costs may be added to your principal, which you’ll have to repay as part of the loan. This is a one-time option – if you default again you’ll have to pay off the loan in full before you qualify for more aid.
Finally, you can consolidate your federal student loan. With consolidation, you’ll convert one or more loans into a single loan with a fixed interest rate and a term of up to 30 years. The longer term of the loan means your monthly payments will be lower, making them easier to manage. You’ll typically have to make at least 3 on-time payments in order to be eligible for loan consolidation. Consolidated loans may also be repaid through any of the federal student loan repayment plans, giving you even more options for repayment.
What if none of these options work for you? Sometimes, you still won’t be able to make payments even after consolidation or rehabilitation. Then you’re facing a collection lawsuit. You’ll receive a complaint and a summons with the time and date of your hearing. In New Jersey, you have 35 days to file an answer. Your answer should address each issue in the complaint. At the hearing, the loan provider will give the court evidence that you did take out a loan from them and that you’re in default. Note that they must prove these things – they don’t automatically win. Sometimes paperwork gets lost, especially when loans are reassigned, so you should always defend the suit. For more detailed information on collection suits, check out this blog post.
Student loan debt is not dischargeable in bankruptcy, so you’ll be stuck with the judgment either way.
What should I do if I’m going to miss a payment?
If you’re going to miss a payment, the best thing to do is reach out to your loan servicer. You won’t be able to hide it from them anyway, so it’s better to be upfront and proactive. Federal student loan servicers know all of the options open to you to keep your loan in good standing. You may choose to change repayment plans or negotiate an affordable and reasonable payment, among other options.
You can be sued if you don’t pay your student loans, so try not to let it get that far. If it does, contact an experienced attorney – she’ll defend you in court and make sure you don’t pay a cent more than you have to.