Understanding Delinquency vs Default on Student Loans

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What is default?

The term “default” means you have failed to make payments on your student loan as scheduled according to the terms of your promissory note, the binding legal document you signed at the time you took out your student loan.

What would happen if I miss a payment on my student loans?

Well, if you miss a payment your loan will become delinquent the first day after you miss the payment. The delinquency will continue until all payments are made to bring your loan current. Loan servicers have the duty to report all delinquencies of at least 90 days to the 3 major credit bureaus, which means, it can affect your credit in a negative way.
A negative credit rating could make it hard for you to borrow money in the future to buy either a car or a house (you could potentially be charged much higher interest rates).

Not only that, but you may also experience trouble

  • signing up for utilities,
  • getting home owner’s insurance,
  • getting a cellphone plan, or
  • getting approval to rent an apartment (credit checks usually are required for renters).

It is very important to make timely payments as soon as you receive a bill.

Consequences of One Late Payment

For now, let’s assume that your loan is delinquent, and that you have only one missed payment at this time. The possible consequences of a delinquent loan include the following:

Ding on Your Credit Report: For Federal student loans, delinquency is typically reported to the three major credit bureaus (TransUnion, Equifax, and Experian) after 90 days has passed. The length of time afforded before reporting to a credit bureau is different for private loans and for each lender; for example, Sallie Mae usually reports delinquent private loans after 45 days. Usually if you are not 45 days late, you won’t incur a bad mark on your credit report—at least, not yet.

Late Fees: There is typically a grace period on delinquent loans before a late fee is assessed, though it varies by lender. Sallie Mae, for example, issues a late fee of 6% of your minimum payment after one late payment that is at least 15 days past your due date. But make sure to call your own lender and ask the same questions so that you understand the consequences of a delinquent federal student loan versus a delinquent private student loan.

Understand the Difference Between Loan Delinquency and Loan Default

Luckily for those with student loans, lenders understand that people make mistakes. Missing one payment and missing several payments are two different issues in the eyes of lenders, and are treated differently as well.

Loan Delinquency: A loan becomes delinquent the day after the missed due date. The loan remains in delinquent status until the borrower takes an action such as payment, deferment, or forbearance.

Loan Default: A loan goes into default when a person fails to repay according to the terms of the agreed promissory note. True, by being late on a payment, you are not adhering to the promissory note. However, there is a time lapse lenders and the federal government will allow before the loan is officially considered to be in default status. For example, most federal student loans will not be moved into default status until after the person has gone 270 days without making any payments.

How can I avoid default?

If you are having trouble making payments on a loan from the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program, you should contact your loan servicer immediately, the agency that is in charge of handling the billing and other services for your loan.

If you are having trouble making payments on your Federal Perkins Loan, immediately contact the school where you received your loan.

If I don’t make my loan payments, when is my loan considered to be in default?

When you are repaying your loans on a monthly basis, default occurs when you fail to make a payment for 270 days on your loan, less than once a month, default occurs when you fail to make a payment for 330 days (this applies only to FFEL Program loans).

What should I do if my loan is in default?

If you have defaulted on any of your federal student loans, take the following steps:

  • Contact the agency that is billing you.
  • Explain your situation fully.
  • Ask them what options are available to get out of default.
  • Ask them to work with you.
  • Always stay in touch with your lender, loan servicer, or collection agency.

What are the consequences of default?

The consequences of defaulting on a student loan can be severe, these are some of them:

  • The entire unpaid balance of your loan and any interest is immediately due and payable.
  • You lose eligibility for deferment, forbearance, and repayment plans.
  • You lose eligibility for additional federal student aid.
  • Your loan account is assigned to a collection agency.
  • The loan will be reported as delinquent to credit bureaus, damaging your credit rating. This will affect your ability to buy a car or house or to get a credit card.
  • Your federal and state taxes may be withheld through a tax offset. This means that the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt.
  • Your student loan debt will increase because of the late fees, additional interest, court costs, collection fees, attorney’s fees, and any other costs associated with the collection process.
  • Your employer (at the request of the federal government) can withhold money from your pay and send the money to the government. This process is called wage garnishment.
  • The loan holder can take legal action against you, and you may not be able to purchase or sell assets such as real estate.
  • Federal employees face the possibility of having 15% of their disposable pay offset by their employer toward repayment of their loan through Federal Salary Offset.
  • It will take years to reestablish your credit and recover from default.

What if my loans are in default, but I think it’s an error?

If you believe your loan has been placed in default by mistake, you may be able to correct the error. Here’s what you should do if one of the following is true.

IF: You’ve been attending school on at least a half-time basis.
THEN: Contact your school’s registrar to get a record of all your dates of at least half-time attendance. Contact each school you have attended since you received your loan so your documentation is complete. Ask your loan servicer for the last date of attendance they have on file for you. If they have the incorrect date for your last date of attendance, provide your loan servicer with a copy of your documentation showing the correct date.

IF: You have a deferment or forbearance.
THEN: Ask your loan servicer to confirm the start and end dates of any deferments and forbearances that have been applied to your loan account. If the loan servicer has incorrect information, provide documentation with correct information.

IF: You believe you’ve made payments that weren’t credited to your account.
THEN: Ask your loan servicer for a statement that shows all payments made on your student loan account. If payments you made are not listed, provide proof of payment to your loan servicer and request that the information in your account be corrected.