my two cents

I Defaulted on My Student Loans. Now What?

Photo: H. Armstrong Roberts/ClassicStoc/Getty Images

Dear Charlotte,

I’m in a lot of trouble with my student loans, and I don’t know where to start. The backstory: Last year, I got laid off from my job at a nonprofit in New York and and moved back in with my mom in Arizona. I wasn’t in the best place, mentally, and I missed a couple of loan payments. Once I fell behind, I felt even worse, so I stopped opening them altogether. I owe about $25,000 last time I checked, which was around February. I have a combination of federal and private student loans, so I’m not sure who to contact about what — in fact, I don’t know anyone I can talk to about this at all. My mom can’t afford to help; I don’t think she even knows how bad it is, and I’d like to keep it that way, because she’d worry. I now have a new job at another nonprofit, but it doesn’t pay much. How can I get back on my feet? I’ve heard that if I wait out my default, I’ll have bad credit for a couple of years and then the debt will go away after the statute of limitations has passed — is that really true? How can I avoid a future of terrible credit and being buried even deeper?

You’re definitely in the weeds, but your reaction is completely normal. We all leave bills unopened and let thorny emails sink to the bottom of our inbox from time to time. The human tendency to put off bad news is so common that psychologists have given it a name: “the ostrich effect” (i.e. burying your head in the sand). A textbook example is that people tend to check their stock portfolios much less often when the market is down than when it’s up. A more worrisome (and fascinating) study found that college students, when presented with STD education and screenings, were actually willing to pay money to avoid getting tested for HSV-1 (herpes), and paid even more to bypass screening for HSV-2 (the worse type of herpes). The desire to remain ignorant of potentially depressing information is a powerful force, and it almost always harms more than it helps.

You should also know that you’ve got company — lots of it, in fact. Disturbing new data from the Department of Education shows that default rates for student loans are much higher than previously estimated; right now, 30 percent of student debt-holders are struggling to make ends meet. If the same trends continue, nearly 40 percent of borrowers may default on their student loans by 2023. Unfortunately, though, a broken education system doesn’t mean you can try to escape your debts.

Well, technically, you can — but you will run the heavy and potentially more expensive risk of being sued by your creditors. As you mentioned, private student loans are subject to a statute of limitations, which means that if you don’t pay anything for a certain period of time (usually between three to seven years, depending on the state), your creditors lose the right to sue you for what you owe. That’s a long time to wait around and worry that someone with court papers is lurking behind every corner, and what’s more, your debt won’t just “go away” once the clock runs out. It’ll stick around on your credit report, and even if your lenders can’t sue you anymore, they might still try, in which case you’d have to defend yourself legally. And if you do get sued within the statute of limitations, you’ll need to pay for a lawyer and sort out a settlement with your creditor, which could cost even more than what you owe in the first place. (You can read more about the finer points of this topic here.)

In short, I don’t recommend trying to white-knuckle your way through this and hope no one comes after you. Not only is it a gamble, but it will also tank your credit score, which will be a lengthy and expensive drag. I have one friend who defaulted on her private student loan of $10,000, and she couldn’t even rent an apartment for over five years. “Payment history accounts for the largest share of your FICO score — 35 percent — so missed payments will profoundly affect it,” says Brianna McGurran, a student-loan expert at NerdWallet. “It’ll be harder to get an auto loan or mortgage, or get a cell phone or hook up utilities without a deposit.”

Instead, you need to take a more direct approach, as unappealing as it sounds: Rip the Band-Aid off and open your bills. Next, figure out how behind you are on each loan, and whether they are federal or private. The private lenders will be the least forgiving, so start there.

If it’s been over 120 days since you last paid a bill, your private loan has likely been sold to a collection agency (which may have announced itself already, via obnoxious calls and emails). You will hate these people, but you will have to engage with them anyway. Here are some useful templates for “action letters” to send to collectors when you’re in default. Your objective is to negotiate a new payment plan or debt settlement that you can stick to. (Do it all in writing, and don’t make any payments until new terms have been agreed upon.)

The collector(s) will not make this fun. They will probably ask for pay stubs as proof of your income (or lack thereof). They might also give you conflicting advice, or refuse to help you altogether. Worst case scenario, you’ll have to hire a lawyer to deal with them. It won’t be a walk in the park, but it’s better — and usually cheaper — than getting sued. (You can find low-fee legal support here.)

Will this involve a giant, boring mess of incomprehensible paperwork and emails? Yes. But it will also put you back in the driver’s seat. Even if it feels like you’re going nowhere fast, that’s better than denial, and it will save you considerable money, time, and stress down the road. What’s more, your nonprofit job might make you eligible for a loan forgiveness plan, but only if you get back into the good graces of your federal lenders — so there’s no time to waste.

Speaking of your federal student loans: there’s nowhere to hide here. The government wants its money back, end of story. There is no statute of limitations. If you don’t pay, they have the right to garnish your wages (literally take a chunk of your paycheck) or withhold your tax refunds.

The upside is that federal loans should be a bit kinder to you. You can go up to 270 days (less for a Perkins Loan) without making a scheduled payment before getting shoved in the default corner — so you may still be in the “delinquency” phase (hooray). If that’s the case, you have two options: You can ask for deferment (temporarily postponing your payments without penalty) or forbearance (pausing and/or reducing your monthly bills). But if you’re past this grace period, then you’ll want to choose between loan rehabilitation (a longer process that involves lowering your monthly payments) or loan consolidation (a faster but more restricted process that basically converts your old loan into a new one with different rules). The Consumer Finance Protection Bureau has a surprisingly user-friendly tool on their website for determining the best — or least painful — course of action. For more support, you could get a student loan counselor to talk you through the process; most agencies charge about $50 for a first session.

Finally, I recommend opening up to your mom. This process is a lot to navigate by yourself. You can make it clear you don’t expect her financial help but would appreciate any support or wisdom she might have. I’m betting she’ll have some to share.

And remember, a lot of people can relate to what you’re going through. Recently, a polished woman in her 30s told me that she’d almost defaulted on her student loans about ten years ago. Like you, she’d been between jobs, broke, unsure of what to do with herself, and avoiding the mail. Then she got a call from her uncle, who said that someone had phoned him about her overdue payments. Apparently she’d listed him as a secondary contact on one of her loan forms, so he was next in line for the messages she’d been dodging. He was worried. “That phone call shook me out of the state I was in,” she says. “It forced me back into reality, and made me realize that no one could fix this but me.” Fortunately, she was able to work things out with her loan officer, make up for the delayed payments, and now — plot twist — has a successful career as a financial adviser. To be clear, your path won’t be that simple. But let this moment be your concerned uncle’s phone call — a reminder that you’re not alone in this.

I Defaulted on My Student Loans. Now What?