If you don’t make your student loan payments, there can be serious consequences that impact your borrowing rights, your credit score, and ultimately your ability to pay off your student loan. But what exactly happens when you can’t pay?
Delinquency. When your student loan is delinquent, it means that you’ve missed at least one payment and your loan is in danger of going into default (discussed below). Think of delinquency as “pre-default.” Delinquency periods (the length of time before your loan goes into default) vary depending on your student loan. For federal student loans, you can be delinquent for up to 270 days (approx. 9 months) before you go into default. For private student loans, your delinquency period is usually far shorter, sometimes as short as 30 days. While your loan is delinquent, your lender or servicer may report the delinquency to credit reporting agencies, which could harm your credit.
You can cure the delinquency by either making your required past-due payment, or by exploring deferments and forbearances. It is very important to come up with a game plan before your loan goes into default. Tip: if you’re worried about becoming delinquent because you have trouble keeping track of all your student loan payments, you may want to explore auto-debit.
Default. Strictly speaking, default occurs when a borrower has broken the terms of the loan contract by failing to adhere to repayment obligations. Defaulted student loans are far more serious than delinquent ones. While you can cure delinquency relatively easily by making your payments or going into deferment/forbearance, once you’re in default, it may be difficult to get out.
Defaulted federal student loans lose many of their unique benefits including broad deferment and forbearance options, loan forgiveness, and your choice of an appropriate repayment plan. Defaulted private student loans lose their deferment, forbearance, and repayment options as well. Any student loan default (federal or private) will likely be reported to credit reporting agencies and the black mark can remain on your credit report for years, severely hindering your ability to get a mortgage, buy a car, or obtain other student financial aid. For federal student loans, you may eventually be subject to wage garnishment, tax offset, and interception of federal benefits. Collections agencies hired by the original lenders (federal or private) may also hound you and harass you, and they can even sue you in court, although sometimes these agencies will violate fair debt collection laws.
Once you’re in default, your ability to get out largely depends on the type of student loan you have. For private student loans, there aren’t too many options besides a negotiated settlement, usually with a lump-sum payment for a hefty portion of the balance (one of the many reasons why private student loans can be very dangerous; click here for more). For federal student loans, you have more options. One of the most common ways of getting out of federal student loan default is an extended 10-month payment plan called “rehabilitation.” If you are eligible, you can also apply for a Federal Direct Consolidation loan as an alternative way to “cure” your defaulted federal loans; this results in one new loan that essentially pays off your defaulted loans. There are benefits, drawbacks, and other important considerations for each option, so you should speak with an attorney or student loan expert (not just a lender or debt collector) to determine which option is best for you. In my experience, debt collectors often will withhold or distort important facts when communicating with a federal student loan borrower, and they may improperly push one option over the other.
The moral here? Default is no fun. If you are having trouble paying your student loan obligations, you should do everything you can to stop a delinquent loan from becoming defaulted. If you are in default, consult with a professional to determine what your options are, and what strategy makes the most sense for you.
