If you fail to make a student loan payment by its due date, your loan becomes delinquent, and there are all sorts of consequences that can result, from late fees to having your loan sent to collections. These consequences will typically depend on how long your loan is delinquent and whether you have a federal student loan or a private loan.
If you miss a student loan payment, take action immediately so you can work to avoid these consequences.
Federal Student Loan Late Payment Penalties
If you fall behind on federal student loan payments, you can expect the following consequences:
Late Fees
Your loan becomes a delinquent payment the day after you miss a payment. During the first 30 days of your delinquency, your loan servicer may charge you a late fee penalty. Your loan servicer will determine when to charge you a penalty and how much to charge.
Damaged Credit
If your loan is delinquent for 90 days or more, your servicer will report the late payments to the three major national credit bureaus—Experian, TransUnion, and Equifax—which keep track of consumer credit scores.
A delinquent loan can potentially damage your credit score. A lower credit rating can make it more difficult to open a credit card, take out loans to buy a house or a car, and limit your ability to obtain other types of consumer credit.
A low credit rating means that lenders likely see you as a greater risk. As a result, borrowers with a less than stellar credit score may qualify for a high-interest rate or be subject to less favorable terms for lines of credit or loans than a borrower with a more competitive credit score.
Credit scores can impact other areas of life too. For example, someone with a low credit score may have trouble signing up for homeowner’s insurance options and utilities or even getting approved to rent an apartment.
Recommended: How Do Student Loans Affect Your Credit Score?
Default
If your loan is delinquent long enough, it can go into default. The timeline for this varies depending on the type of loan you have.
After 270 days of delinquency, loans made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program go into default.
For loans made in the Federal Perkins Loan Program, a default may be declared more quickly such as soon as a payment is late.
Borrowers with a Perkins Loan, which stopped being made by the federal government in 2017, can contact the school that made the loan or the school’s loan servicer to learn more about repayment requirements.
Once a federal loan goes into default, it can trigger the following consequences, among others:
• The entire loan balance becomes due immediately, including any interest that you owe. This is a process known as acceleration.
• Deferment or student loan forbearance, which allow borrowers to temporarily suspend loan payments, are no longer options. Borrowers may also lose the ability to choose a repayment plan.
• You lose eligibility for additional federal student aid, so you won’t be able to take out federal student loans in the future should you decide to go back to school.
• Your transcript is the property of the school you attend, and your school is allowed to withhold it until you are out of default.
• Your tax refunds may be withheld to repay your defaulted loans. This process is known as a Treasury offset. The government will send a notice of intent to your last known address before these offsets begin, and they will continue until your loan is repaid or the default status of your loan changes.
• Your employer may be forced to garnish your wages. This means that they will withhold up to 15% of your paycheck and send it to your loan holder to repay your loan. The government will send a notice that explains the intent to garnish your wages in the next 30 days. At this point you may have a chance to enter into a voluntary repayment agreement.
• You may be taken to court by your loan holder, and you may be liable for court costs, collection fees, attorney fees, and other costs.
• You are liable for the cost of collecting your defaulted loans. Your default loan may be placed with a private collections agency, which may charge 17.2% of your outstanding balance, including interest and fees. Before your loan is sent to collections, the Department of Education will send you a notice explaining how to avoid this outcome and how to avoid having it reported to the credit bureaus. Having a defaulted loan turned over to a private collections agency can significantly increase the total cost of the loan. That’s because when you make a payment after your loan has been sent to collections, the 17.2% collections cost is taken out first and the remainder is put toward paying off your loan.
Recommended: Types of Federal Student Loans
Private Student Loan Late Payment Penalties
When you miss payments on private student loans, you may face similar consequences as when you miss federal payments. However, private lenders can choose the actions they pursue, and they may operate on completely different timelines.
For example, they may report late payments to credit bureaus or declare that a loan is in default faster than with federal loans.
Private lenders do not have the option of accessing your tax refund to pay back your defaulted loan. However, they can take you to court to gain the ability to garnish your wages.
Lenders may have different policies when it comes to late or missed payments on student loans so check with your lender directly if you have questions about a private student loan.
What To Do If You Miss A Payment
First things first: When you miss a payment, contact your lender immediately and let them know. This is your chance to clue them into any financial hardships that you might be experiencing. For example, if you missed a payment due to job loss or a medical emergency, there may be things your lender can do to help.
If paying off your loans looks like it will be difficult for the foreseeable future, consider deferment or forbearance. Federal student loan deferment is a program offered by the government that allows you to pause student loan payments for up to three years.
The deferment can give you time to put your finances back in order so you can start making regular payments again. Those with direct subsidized loans won’t usually be responsible for paying the interest that accrues over the deferment period. On the other hand, those with unsubsidized loans, are on the hook for those interest payments.
Forbearance can allow you to stop making payments for specific periods. This program can help you if you’re facing short-term emergencies. Unfortunately, interest continues to accrue on your loans, adding to your total cost over time.
Private lenders may or may not have an option that allows borrowers facing financial difficulties to pause their payments.
SoFi, for example, offers Unemployment Protection which allows qualifying borrowers to temporarily suspend monthly payments. Check with your lender directly to see what options are available for your private student loans.
If you have a federal student loan in default, consider enrolling in a student loan rehabilitation program. To rehabilitate a defaulted Direct Loan or FFEL Program Loan you’ll enter into an agreement with your loan holder under which you’ll make nine affordable monthly payments, each within 20 days of its due date. And you’ll need to make all nine payments during a 10-month consecutive period.
To rehabilitate a Perkins loan, you’ll have to make full monthly payments each month (within 20 days of the due date) for nine consecutive months. Your loan holder will determine the monthly amount you’ll pay.
The Takeaway
Late student loan payments can have consequences for borrowers. For many federal loans, after 90 days of missed payments, the late payments will be reported to the three major credit bureaus. This has the potential to negatively impact an individual’s credit score.
After 270 days of missed payments, a borrower’s loan will be placed in default where additional consequences can kick in. These consequences can include the full total of the loan being due immediately, wage garnishment, and more.
The consequences for late payments on private student loans may vary by lender but can include things like late fees and the loan being sent to a collections agency.
Taking Action
Missing a student loan payment can lead to some serious consequences, especially if you let it go for too long. Understanding the consequences and taking action immediately can help you avoid some of the most serious effects and keep you on track to eliminate your debt.
If the cost of a student loan has become too much, one option borrowers may consider is refinancing to a loan with better terms and a lower interest rate.
Note that refinancing is not the right option for everyone, and borrowers who have struggled to make payments on an existing loan or have a low credit score may not qualify for more competitive terms on a refinanced loan.
Refinancing a federal loan also results in the elimination of federal benefits, such as deferment or forbearance which may be useful tools for borrowers who are struggling to make on-time payments on an existing student loan.
Student Loan Refinancing
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If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE THAT THE WHITE HOUSE HAS ANNOUNCED UP TO $20,000 OF STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS AND $10,000 FOR QUALIFYING BORROWERS WHOSE STUDENT LOANS ARE FEDERALLY HELD. ADDITIONALLY, THE FEDERAL STUDENT LOAN PAYMENT PAUSE AND INTEREST HOLIDAY HAS BEEN EXTENDED TO DEC. 31, 2022. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE THE AMOUNT OR PORTION OF YOUR FEDERAL STUDENT DEBT THAT YOU REFINANCE WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
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