Missing a payment on your student loan can result in a lot of financial disadvantages in both the short and long term. If you are behind in payments, it will help you to know what penalties might apply, how delinquency differs from default, and what steps you may take to fix the situation.
Understanding student loan delinquency and default
What Is delinquency?
A student loan goes into delinquency on the day after the payment has been missed. So, while a days-late payment may not incur an adverse action, your loan servicer may charge you a late fee, and extended delinquency can lead to distraction in your credit score.
What Is default?
Default is a legal status for a loan that remains unpaid after a certain period, which would be 270 days (about nine months in layman’s terms) for federal student loans. After a loan goes into default, you may be confronted with serious financial and legal consequences ranging from wage garnishment, the loss of eligibility for financial aid, to lawsuits.
Consequences of missing a student loan payment
1. Late fees
If your payments are late, your loan servicer can impose a late payment fee according to the terms of your loan. Generally, federal programs do not impose any such fees until after thirty days, while the private sector may impose late fees on the very first late payment.
2. Damaged credit history
After a 90-day period of delinquency, federal loan servicers will report your account to the credit bureaus. This can greatly affect your FICO score and make it all the more difficult to be approved for loans, rent an apartment, or even hold a job in some industries.
3. Capitalization
If you miss payments, your loan keeps accruing interest. In the case of federal loans, the unpaid interest could be capitalized when the loan goes into default and added to the outstanding loan amount. This way, the amount you owe will be increased.
4. Costs related to collection, i.e. Legal action
When a loan defaults, it is typical for the lender to turn it over to collections, imposing fees on the debtor of up to 25% of the total debt owed. The lender may then proceed with legal proceedings to recover the debt.
5. Garnishment of wages and seizure of tax refunds
For federal loans in default, the government is allowed to garnish wages of up to 15% without court proceedings. Tax returns and Social Security benefits can also be withheld to repay the debt.
6. Loss of federal loan privileges
Once they default, borrowers with federal student loans become ineligible for provisions such as deferment, forbearance, and income-driven repayment (IDR) plans. This entails fewer options for managing repayment in the future.
How to avoid going into default on student loans
1. Use automatic payment scheduling
Most loan servicing companies offer reduced rates for those who take part in automatic payment schedules. This means your due dates will never be missed again.
2. Budget for paying your payments
Scale your student loan repayments down to your monthly budget. A 50/30/20 approach will help you to make the right allocations.
3. Visit loan repayment assistance programs
Consider applying for an income-driven repayment (IDR) plan if you’re financially too strapped for cash. These programs formulate the appropriate monthly payment based on your salary and family size.
4. Refer to deferment or forbearance
For such cases where you have financial problems, deferment or forbearance can be applied. Deferment or forbearance does not begin until the applicant has completed the forms. But interest might continue to accrue.
Here’s what you should do if you already missed payments:
1. Call up your loan servicer
Call your loan servicer immediately. They can help by offering other alternatives such as hardship assistance or a different repayment plan.
2. Apply for income-based repayment (IDR)
With IDR, you might even bring your payments down to $0 per month if you’re making little or nothing. Your loan then stays out of default status.
3. Think about consolidation or refinancing for loans
Federal loan consolidation is when you put all of your federal loans in one place to clear out multiple payments and put them under one. You might get a great interest rate when you refinance with a private lender, but the downside is that federal protections will be lost.
