Here’s what you need to know—and how to get back on track.
What Is Student Loan Delinquency?
Student loan delinquency is the status of a student loan when the borrower fails to make a payment by the due date. Paying even one day late can mean your loan becomes delinquent. The student loan is delinquent until you catch up on payments or make other arrangements with your lender. If you don’t bring the account current by catching up on your payments, the student loan delinquency will be reported to the three major credit bureaus. The length of time before the lender reports your delinquency depends on the type of student loan:
Federal student loans: The federal student loan servicer reports an account as delinquent after 90 days of nonpayment.Private student loans: Private lenders aren’t required to follow the same guidelines as federal loan servicers. Each lender has its own delinquency policies, but private lenders may report delinquencies after as little as 30 days of nonpayment.
What Is Student Loan Default?
Student loan default is the failure to repay student loans. A student loan default is serious, and can be much more damaging to your credit and financial health than delinquency. If a delinquent student debt is not brought current, it will enter student loan default.
Federal student loans enter default after 270 days of delinquency (nine months). Private student loan default is triggered by specific events as outlined in your loan contract, such as being delinquent for a certain amount of time or even missing just one payment.
Upon default, your current balance owed comes due immediately—you can no longer repay this debt through the original installment plan, and you can’t access forbearance, deferment, or repayment plan options. The default will also typically be reported to credit reporting agencies, which can damage your credit score and can incur additional new costs and fees. If you don’t immediately repay the student loan in full, the lender or servicer will take action to collect on the unpaid debt, such as contracting a collection agency or pursuing wage garnishment.
Student Loans in Default vs. Delinquency
However, once a student loan is in default, you can’t resolve it by just catching up on payments. Federal student loan defaults can be resolved through full repayment, student loan rehabilitation, or student loan consolidation. A few private lenders may offer loan rehabilitation, but borrowers may need to use other tools such as negotiating a debt settlement or payment plan. Read your loan contract or call your loan servicer to review your options. Another important difference is that the effects of student loan default are more serious and harder to fix than those of student loan delinquency.
Why You Need to Manage Student Loans in Default
If you put off dealing with a default, the consequences can snowball and damage your credit and financial health. When a federal student loan defaults, the servicer can place this debt with a collection agency, where it will incur a collection fee of 17.92% of the total loan amount. Private lenders may also hire a collection agency to handle the account, or charge off the loan and sell the debt to a collection agency. You can face collection, court, and attorney’s fees here as well. In most cases, lenders or collection agencies will attempt to work with you after default to agree to a new repayment plan. But if nonpayment continues, they can take you to court over defaulted student loans. If the lawsuit is successful, the court might grant a judgment allowing the creditor to use tools such as wage garnishment or a lien on assets to collect on the debt. Collection agencies can collect on federal student loan debt by garnishing wages, tax refunds, or federal benefits, such as Social Security benefits. For example, approximately $171 million in defaulted student loan debt was collected through Social Security offsets in 2015. Almost half of borrowers age 50 and over had 15% of their monthly benefits withheld, the maximum amount allowed. A person receiving the $1,514 monthly average benefit from December 2020 would have $227 deducted each month to repay their defaulted student loans, bringing their Social Security income down to $1,287 a month. Lastly, student loan defaults and accounts sent to collections are reported to credit bureaus, and this information can lower your credit scores and make it difficult to secure new loans or credit.
How to Tackle Student Loans in Default or Delinquency
At the beginning of 2020, before this change took effect, $10.7 billion student loans owed by about 420,000 borrowers were more than 270 days overdue. Of the borrowers whose federal student loans entered repayment in 2017, 9.7% had a defaulted loan within three years. For private student loans, reach out to your lender. You can also request a free copy of your credit report, which should list any loan delinquency or default.
