Missing your student loan payments can jeopardize your credit. If you’re delinquent on student loan debt, take action before you default. Your options in delinquency or default vary depending on whether you have federal or private student loans.
With inflation pushing prices up and putting pressure on countless American wallets, those with qualifying federal student loans have received a welcome break. Since March 2020, many borrowers have enjoyed a pandemic reprieve on payments – including a pause on interest accumulation.
But after multiple payment relief extensions by two presidential administrations, federal student loan payments are set to resume in October, with interest starting to accrue on Sept. 1. And if you have private student loans, you likely still owe payments as well. If you’re concerned about your student loans with federal student loan payments set to restart, now’s the time to take action.
What Really Happens if You Don’t Pay Your Student Loans?
First, it’s never ideal to default on any debt. But you could put your credit at substantial risk if you’re late on student loan payments. From derogatory marks on your credit report that bring down your score to potential wage garnishments and collection actions, lenders have their ways of making you pay.
But you can prevent these situations with a bit of proactive thinking, regardless of your student loan type. To do so, it helps to understand the two stages of late payments – delinquency and default. Your loan type and stage of lateness dictate your available relief options and credit impacts.
What Happens If Your Student Loans Are Delinquent
Your student loans will be considered delinquent from the first date your loan payments become past due. Once your missed payment reaches a certain threshold – which is 90 days for federal loans and can be 30 days for private loans – your lender will report your delinquency to the major credit bureaus. If that feels like “so what?” to you, know the consequences are nothing to shrug off.
Your credit score will likely take a hit once your credit report shows a delinquency. If you need to borrow money, a lower score could impact which lenders approve you for credit and, if approved, likely result in a higher interest rate. Being late can also increase your student loan balance since you’ll continue to accrue interest and lender fees.
What Happens If Your Student Loans Are in Default
Most federal student loans go into default once payments reach 270 days late. However, those with Perkins loans could be declared in default if they miss the due date on a single payment. Private student loans may go into default once you miss three payments.
Defaulted loans have severe consequences that can vary depending on whether they’re federal or private. Consequences could include:
- Immediate loss of eligibility for additional federal student aid.
- Loss of eligibility for federal relief, which takes payment plans, forbearance and deferral off the table until your account is rehabilitated.
- Ineligibility for all forgiveness programs.
- Capitalization of interest, which adds outstanding interest to your loan balance, so future interest is calculated on a higher amount.
- Your lender sends your debt to a collection agency with potential legal action.
- Government garnishment of up to 15% of your disposable income, seizure of federal and state tax refunds, and having a portion of Social Security benefits withheld.
- The default can stay on your credit reports for up to seven years.
- Inability to obtain a mortgage or borrow funds for other purposes due to credit damage.
Relief Options for Delinquency
If you’re delinquent on your student loan payments, there’s one bright side: There’s still time to make things right before you default. The important thing to note about delinquency is that communication with your loan servicer is key. The sooner you reach out for help, the easier it might be to avoid default.
Both federal and private student loans have relief options for borrowers in delinquency.
Federal Student Loans in Delinquency
If you have a federal student loan in delinquency, the government gives you three options to bring your account back to good standing: payment plans, deferment and forbearance.
- Payment plans, including cost-saving income-driven repayment plans, or IDR plans, can help make your student loan payments budget friendly. If you aren’t sure which plan is right for you, you can use the government’s loan simulator to see which one best suits your goals. Current IDR plan options give borrowers a range of ways to make their student loan payments in their budget, says Brian Walsh, a certified financial planner and senior manager of financial planning at SoFi, a private student loan lender and personal finance company.
- Deferment is a temporary suspension of payments on your loan, but interest will continue to accrue. The Department of Education suggests exploring an IDR plan instead of deferring, as you can still make affordable payments (potentially $0 per month) and your loan still qualifies for forgiveness down the line.
- Forbearance is also a temporary suspension of payment, but you remain responsible for making interest payments. If you let interest accrue and capitalize, your loan balance will increase. General forbearances – those granted at the discretion of your loan servicer for financial hardship – can last for up 12 months at a time, with a cumulative limit of three years. Mandatory forbearance is available to eligible teachers and those in certain public service or defense roles or medical internships or residencies. It’s also available for up to three years to borrowers who owe 20% or more of their monthly gross income. Mandatory forbearances are for periods of up to 12 months and can be renewed if you continue to qualify.
Private Student Loans in Delinquency
If you’re nearing default or already in it, your best bet is to contact your lender as soon as possible, says John Owens, executive vice president at Monterey Financial, which provides loan servicing, debt collection and other services. “By doing so, borrowers can explore all the options available to them and take steps to avoid default.”
During that call or email, state your case and inquire about the lender’s options to bring your account current. Owens says private lenders may offer payment plans, or you may be able to refinance your private student loans with another lender. Private lenders may also have a version of deferment or forbearance available. But with all these options, your lender may charge fees. Be sure to read your loan contract or ask your lender about fees before you choose a way forward.
Relief Options for Default
Once you have defaulted on your student loans, your relief options dwindle – even more so for private student loans. But don’t feel like all is lost. At this stage, getting your loan out of default should be your No. 1 priority. While it might take some time, it’s possible to restore your defaulted loans to good standing.
Federal Student Loans in Default
If your federal student loan goes into default or was in default when the government suspended payments in March 2020, you have only three options to cure your debt: pay the outstanding balance and interest in full, qualify for a consolidation loan or rehabilitate your account. Since paying your loan in full may not be feasible, it’s more helpful to focus on the other two options.
- Consolidation loans. A consolidation loan pays off your defaulted student loan debt and refinances some or all of your eligible student loans into a new loan. Consolidation loans can either be federal or private, and each has its pros and cons. However, the most important thing to remember about a consolidation path is that consolidating could impact your eligibility for loan cancellation programs. It’s important to speak with potential consolidation lenders to get the details before you take out the loan.
- Rehabilitation. For those with direct loans or older Federal Family Education Loans, rehabilitation involves making nine consecutive payments of a reasonable amount within 20 days of the due date – and within a 10-month period. The Department of Education, or a different loan holder if you have FFEL loans, considers a “reasonable amount” to be 15% of your annual discretionary income divided by 12. Those with Perkins loans can rehabilitate an account by making a full monthly payment within 20 days of the due date for nine consecutive months, and the loan holder will determine the required monthly payment. It’s important to note that the nine-month process doesn’t stop collections activity or Treasury offset withholdings from benefits like Social Security. Also, collections payments won’t count toward your nine-payment requirement. However, once you meet the nine-payment requirement, your loans will be out of default, and all collections and Treasury offset withholdings cease.
The government’s Fresh Start program also offers defaulted borrowers a new and favorable way to rehabilitate their accounts. Launched in 2022, the program offers a three-for-one: It brings defaulted accounts current, removes the record of default from your credit report and immediately restores your eligibility for additional federal student aid.
Note that Fresh Start will be available until one year after the COVID-19 payment pause ends. Thus, time is of the essence. To enroll, you’ll need to contact either the Department of Education or your loan’s guarantee agency – whichever holds your loan. You’ll need to provide basic information on you and your spouse’s income, family size, dependents and tax filing status. Then, you’ll be set up with a repayment plan.
The Department of Education reports that roughly 80% of Fresh Start borrowers choose an IDR plan. Half of borrowers on Fresh Start are paying $0 per month, and 60% pay less than $50 per month, according to the Department of Education.
Find the Best Student Loans for You
Private Student Loans in Default
In the most Robert Frost of ways, default is where the paths between federal and private student loans diverge most significantly.
Unlike federal loans that have mandated remedies for default, private student loans don’t. Your available options “are dependent on each of the private lender’s policies and procedures,” Owens says. Private lenders typically charge off accounts – meaning they close them to future charges and write off the unpaid balances as a loss – once they’re 120 days late. That means you’ll likely deal with a collection agency and potential legal action, which is never a pleasant thought.
However, some private lenders have rehabilitation programs. If you’re nearing default or in default, contact your lender. They can let you know if they have a rehabilitation program and, if so, what steps to complete to bring your account out of default. Then, ask what updates the lender will make to your credit report once you’re current again.
In a worst-case scenario, you may be able to discharge both federal and private student loan debts in bankruptcy. But bankruptcy drops a bomb on your credit for at least seven years. Before pursuing bankruptcy, it’s important to exhaust all other options.
Reviewed on July 5, 2023: This article was previously published at an earlier date.