If you’ve missed a student loan payment or are struggling to make payments, you’re not alone. According to the Department of Education, millions of loans are currently delinquent, with many more being sent to collections every day.
What happens when you can’t afford to make a payment, and subsequently miss the due date? If you have federal student loans, at first, you’ll be delinquent. Nine months after you miss a student loan payment, your loans will then enter into default status.
If you have private loans, there’s no “grace period” of delinquency; your loans are immediately in default the day after your payment was due.
While this might sound like bad news, there are ways to recover from delinquency and default. We’re covering what the consequences are, and what options you have to get your loans current again.
What Does Being Delinquent Mean and What Are the Consequences?
Do you remember that promissory note you had to sign every semester when taking out student loans? That note was a binding contract in which you promised to make timely payments on your student loans (among other things). By missing a payment, you are in direct violation of that contract.
The day after your payment is due, you are considered delinquent on your student loans. During your delinquency, your student loan servicer will attempt to get in touch with you in the first 15 days following a missed student loan payment.
Your credit score can also suffer if you don’t make any payments within a certain time. For example, My Great Lakes will report a lateness to the 3 major credit bureaus (Experian, Equifax and TransUnion) once an account is 60 days past due, but Nelnet will wait 90 days. Different servicers have different guidelines for this, so it’s best to call yours directly to ask them for the specifics.
Even if you become current on your loans, the delinquency can remain on your credit report for up to 7 years.
Additionally, you might incur late fees if you don’t make an effort to pay within a set time frame. Late fees vary by lender, and the amount of time passed before getting hit with a late fee also depends on the lender.
While being delinquent isn’t great, it’s not the end of the world. Simply making a payment will bring your loan into repayment again.
But what if you can’t afford that payment?
After nine months of missed payments, your loan will go into default. Nine months is a considerable amount of time to work with your student loan servicer in an attempt to lower your payments, and that’s exactly what you should do.
Steps You Can Take To Get Out of Delinquency
If you’re delinquent on your student loans, the absolute best thing you can do is to get on the phone with your student loan servicer and explain your situation to them. You want them on your side in this process, and most are willing to help you out. Many servicers have information and options on lowering payments directly on their website.
If you can afford to make any sort of payment, do so. This will show your loan servicer that you’re concerned and making every effort to rectify your delinquent status.
The worst thing you can do in this situation is to ignore what’s going on. You have 9 months in which to make things right before going into default, and you want to do everything in your power to make sure you don’t get reach that point.
When speaking with your loan servicer, ask them to review your payment options.
Under certain circumstances, you may be eligible for deferment or forbearance. Both will excuse you from having to make any payments for a set amount of time. Interest doesn’t continue to accrue if your loans are in deferment, but it will accrue in forbearance.
Typically, forbearance is easier to qualify for than deferment, and there's no limit to how many months you can ask to stay in forbearance. But because interest accrues, and you're not making payments, your loan balance will grow every month you're in forbearance. But you won't have any negative marks on your credit report.
If you’re not eligible for either of these options, don’t lose hope. There are several different income-based repayment options out there, including Pay as You Earn, Income-Based Repayment and Income-Contingent Repayment, and your student loan servicer will point you toward the one that makes the most sense for you.
Your number one priority when your student loans are delinquent is to get them current as soon as possible so that they don’t go into default.
What Consequences Does Defaulting On Your Student Loans Have?
If you haven’t been able to make any payments toward your student loans in 9 months, and haven’t reached out to your servicer, then you will end up defaulting on your student loans.
There are serious consequences to defaulting:
- Some loan holders will require your entire balance to be paid in full. This includes the principal and the interest.
- You become ineligible for deferment, forbearance, or any repayment programs.
- You become ineligible for further federal student aid.
- Your wages can be garnished, plus your tax return can be held to repay your loans.
- Your credit score will be damaged.
- You might end up responsible for more than just your loan balance if there are late fees, collection fees, or court fees involved.
These all sound a little scary, don’t they? While defaulting on federal student loans shouldn’t be taken casually, there are ways to improve your situation.
Options for Getting Your Loans Out of Default
In order to get your loans out of default status, you have to make a plan. The unfortunate part is that you have significantly less options than you would in delinquency, and the options you do have require you to be able to make payments.
MyEdDebt.com is a great resource for those looking for more information on getting their loans out of default. The site is run by the Department of Education and highlights its Rehabilitation Program as an option for getting loans out of default.
Going through a rehabilitation program is your best chance at redemption. Upon successfully completing the program, all the negative consequences of defaulting will be reversed. That even includes the damage to your credit score (the default will be erased).
Successful completion involves making 9 monthly payments out of 10 months, so it’s important that you can make the payments according to the plan you’re given. You have to make the payments monthly; lump-sum payments or extra payments will not speed up the process.
A debt collector creates your repayment plan during rehabilitation. They’re supposed to work with you to create a manageable repayment plan, though some of them have wrongfully tried to get borrowers to pay back more than they can afford.
StudentLoanBorrowerAssistance.org has highlighted the importance of paying back only what you can reasonably afford, as a new system was put into place this past July. Under this system, the amount you must pay should coincide with what you would be paying under the Income Based Repayment formula. For “not new borrowers” this is generally 15 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. For “new borrowers”, it’s 10 percent of discretionary income.
New borrowers are defined by:
“… (1) no outstanding balance on a Direct Loan or FFEL program loan as of October 1, 2007 or has no outstanding balance on a Direct Loan or FFEL program loan when you obtain a new loan on or after October 1, 2007, and (2) received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or student Direct PLUS Loan on or after October 1, 2011, or received a Direct Consolidation Loan based on an application received on or after October 1, 2011. However, you are not considered a new borrower if the Direct Consolidation Loan you receive repays loans that would make you ineligible under part (1) of this definition.” – StudentLoans.gov.
Once you’ve gone through the rehabilitation program, a lender must purchase your loans in order for them to enter back into standard repayment status. Likewise, only after a lender has purchased your loans will the collection agency ask the credit bureaus to clear your credit report of the default.
Just note that you may only go through the rehabilitation program once. If your loans fall back into default, then you won’t be eligible for the program.
What About Defaulting on Private Student Loans?
Private student loans are a different beast. There’s no delinquency period associated with private loans; as soon as you miss a payment, your loans have defaulted.
Unfortunately, private loans don’t offer the same protection as federal loans do. Therefore, the repayment options associated with federal loans don’t apply for private loans.
Even worse, there aren’t any rehabilitation programs to go through for private loans, unless your lender offers such a program. It’s worth it to ask!
Wells Fargo reports a loan as late after 30 days have passed, and their standard late fee is $28, though this largely depends on the type of loan you have.
For Citizen's Bank, private student loans are serviced through Firstmark. Their loans are reported as late after being 30 days past due (from the last business day of the month). The loan is considered defaulted after 120 days past due, and late fees (5% of the borrowed amount) are incurred after the loan is 15 days past due.
According to Sallie Mae, depending on the type of loan you have, you're considered to have defaulted after 6 to 9 months of no payments.
Fortunately, there are some private lenders coming around to the fact that borrowers need help. Wells Fargo is one private lender willing to lend a hand. If you're having trouble making payments, they offer additional repayment options, and they also have a new loan modification program which can lower your payments temporarily or permanently.
Sallie Mae offers borrowers interest-only payments on certain loans, and they also offer a graduated repayment option on their Smart Option Student Loan.
Discover also offers deferment options to those serving in the military, in public service jobs, or in a residency program.All lenders encourage borrowers to call if they're having trouble making payments under their current repayment terms. But you should work under the assumption that once you're 30 days late it will show up on your credit report, which can stay there for seven years.
The Consumer Financial Protection Bureau has attempted to strip away some of the uncertainty and confusion surrounding student loans, but according to a recent report, the industry remains unchanged. More and more complaints are being received concerning private loans, as borrowers claim they don’t have enough information about the options they have.
The CFPB is encouraging borrowers to use a template that they have available for download to try and negotiate a repayment plan with their lenders. This should be done as soon as you miss a payment, as your private lender will sell your loan to a collection agency after enough time has passed without a payment. They will be more willing to help you than a collection agency will.
As a last resort, you may be able to get your private student loans discharged in bankruptcy. Private loans are slightly easier to get discharged than federal loans. If you’d like to read more about that process, StudentLoanBorrowerAssistance.org has a comprehensive write-up on it.
You want to avoid defaulting on your student loans at all costs, so if you’re delinquent on your loans, get in touch with your loan servicer to figure out the best way to bring your account current. If you’ve already defaulted, check with your loan holder to see if you can enter into a rehabilitation program. If you have private student loans, contact your lender immediately to find out if you can negotiate more manageable repayment terms. These options are available to help you, and there is no shame in taking advantage of them.