Default

Detailed Explanation

Default refers to the situation where a borrower fails to meet the legal obligations of a debt repayment. Defaulting on a student loan occurs when a borrower fails to make payments on the loan according to the terms and conditions outlined in the promissory note, which is the legal document signed by the borrower at the time the loan is taken out. 

The definition of default can vary slightly depending on the type of student loan and the specific terms agreed upon, but generally, default occurs if a payment is not made for approximately nine months. 

When a default occurs, it typically triggers a series of legal and financial consequences. The lender may report the default to credit bureaus, leading to a significant drop in the borrower's credit score. This can impact the borrower's ability to obtain future credit, acquire housing, or even secure certain types of employment. Additionally, the lender may initiate collection actions, which can include wage garnishment, or legal proceedings.

Example

John graduated from college with significant student loan debt. He found a job after graduation, but it didn't pay as much as he had hoped, and he struggled to make his student loan payments. Instead of contacting his loan servicer to discuss alternative payment plans or deferment options, John simply stopped making payments altogether causing the loans to go into default, which resulted in a drop in his credit score and eventually wage garnishments. 

Key Articles Related To Default

• How To Get Out Of Student Loan Default
• Strategic Default For Student Loans: Why It's A Bad Idea

Related Terms

Delinquency: Missing one or more debt payments but not yet in default.

Forbearance: A special program that lets you delay making payments on your student loans for a period of time.

Bankruptcy: A legal process where individuals or businesses declare their inability to repay outstanding debts.

Credit Score: A numerical expression representing an individual's creditworthiness, based on an analysis of their credit files.

Frequently Asked Questions

What happens to my credit score if I default on a loan?

Defaulting on a loan will likely lead to a significant drop in your credit score, affecting your ability to borrow in the future. It can also lead to additional fees and wage garnishments.

Can I recover from a default on a debt?

Yes, with time and effort, you can recover from a default. This includes negotiating with lenders, setting up repayment plans, and steadily rebuilding your credit.

What should I do if I’m at risk of defaulting on a loan?

Contact your lender as soon as possible to discuss potential options, such as loan modification, forbearance, or refinancing.