Today over 44 million borrowers have $1.4 trillion in student loan debt. The average debt it $37, 172, so it should come as no surprise that many have trouble paying all that back on time. In the 4th quarter of 2016, new delinquent balances of 30 days or more stood at $32.6 billion. New seriously delinquent balances of 90 days or more stood at $31 billion.
Let’s Define Delinquent
Should you be having trouble making your student loan payments, it is important to understand the difference between “delinquent” and “default.” To define delinquent, it is simply being late, even a few days late, in making a loan payment. “Default” is when the borrower fails to make payment for a period of 270 days (about nine months) under 34 Code of Federal Regulations 685.102. 11.2% of student loan borrowers are delinquent, some in default. If you have a federal student loan, the government is not going to start to collection procedures until you are in default. If you have a private student loan, the point at which the lender considers you to be in default may vary according to the institution and the type of loan.
What You May Face if You Are Delinquent
Federal student loans have a lot of flexibility and options if you are having trouble paying. But should you just ignore your debt and let your delinquency go to 270 days or more, the government has the resources and the authority to come after you for the money, and there is no time limitation. This may include
- Seizing your tax refunds
- Turning you down for new loans
- Garnishing your wages without even getting a court order
- Seizing part of your Social Security benefits
- Adding a big collection fee on top of it all
Of course, if you default on a private student loan, a private lender can also take collection actions, but they don’t have quite as strong of an arsenal as the federal government. But generally speaking, you have more repayment flexibility with federal student loans than private ones.
When you are delinquent on any loan, your credit score may drop. How much it drops depends on how long you are delinquent and your own particular credit history. The more often and longer you are delinquent, the more it will impact your credit score. That means if you want to take out a personal loan you may end up paying a very high rate – if you can get one at all. And that goes not just for student loans but other loans too such as car loans and mortgages.
Avoid Student Loan Delinquency
If you are struggling to make payments, contact your lender before the problem gets worse. Federal student loans and many private ones allow some flexibility in payments.
Forgiveness and Income-Driven Repayment Plans
You can apply to be on an income-driven repayment plan(IDR) that sets your monthly student loan payment at an amount that is affordable based on your income. Four plans are available and you can apply here. If your loan is not eligible for an IDR plan (such as Parent PLUS loans), you can become eligible through a federal Direct Consolidation Loan. After 20-25 years on an IDR plan, any unpaid amount will be forgiven.
Now that you know how to delinquency works, you can avoid it by contacting your loan provider to discuss your qualifications for postponing repayment through deferment or forbearance.
Deferment is a postponement of federal student loan payments. You may qualify for a variety of reasons such as being in the military or in school. All federal student loans offer deferments to qualifying students, but some private lenders do also. If you can defer payments, interest doesn’t accrue on the subsidized portion of your loans.
Forbearance is very similar to deferment but is often granted due to a hardship such as financial difficulties or medical expenses. It is available for up to 12 months, and you must pay interest. You can request another forbearance if you are still in difficulty after 12 months. Federal student loans have criteria for qualifying for forbearance. Private venders may grant forbearance, but often they do not or as not as flexible. Check the contract.
Get Out of Default
If you’ve been delinquent for 270 days and as a consequence have fallen into default on your student loans, it is possible to get out if you act quickly. You can consolidate your federal student loans or rehabilitate them. However, this is still going to require you to make monthly payments. If you can’t make monthly payments, these options are not for you.
Loan rehabilitation enables you to clear the default on a federal student loan. When you default, you lose eligibility for student aid. If you can rehabilitate your defaulted loan, you can regain eligibility. You can get out of default through rehabilitation only once for each FFEL (Federal Family Education Loan) or Direct Loan. To rehabilitate a FFEL loan, you must contact your loan holder. If you are not sure who that is, you can find out on the My Federal Student Aid site.
To rehabilitate the loan, you must make nine monthly payments within 20 days of the due date during a period of 10 consecutive months. There are also some exceptions to the 10-month rule, such as if you can’t pay due to military service. (Loans through the Perkins Program which gives low-interest federal student loans for undergraduate and graduate students with exceptional financial need have different criteria.)
To rehabilitate your student loan, you must be able to make payments under one of these two plans:
- Your loan holder will determine a monthly payment amount that is 15% of your annual discretionary income divided by 12. Discretionary income, according to the government’s Federal Student Aid site, “is the amount of your adjusted gross income (from your most recent federal income tax return) that exceeds 15% of the poverty guideline amount for your state and family size.” Needless to say, you will need to provide proof of your income.
- If you still can’t afford to make the rehabilitation payments, you can ask your loan holder to calculate an alternative monthly payment based on the amount of your monthly income that is left after subtracting your monthly expenses. This could end up being a lower amount.
Once the loan is rehabilitated, the notation of default should be removed from your credit record. This is not to say that your credit record will return to what it was before you fell into delinquency and default, at least not until you rebuild it.
If your federal student loan is in default, another option is to pay it off a new Direct Consolidation Loan. You must agree to one of these types of payment plans:
- Income-driven repayment plan or
- Make three consecutive, voluntary, on-time, full monthly payments before you consolidate
If you already consolidated and that loan is in default, it is possible to reconsolidate a Direct Consolidation Loan or Federal (FFEL) Consolidation Loan
- To reconsolidate a defaulted Direct Consolidation Loan, you must also include at least one other eligible loan in the consolidation.
- A defaulted FFEL Consolidation Loan may be repaid with a new Direct Consolidation Loan without adding any other loans, but to do so you must agree to an income-driven repayment plan.
After your student loan is consolidated, you will once again be eligible for more federal student aid, and the new Direct Consolidation Loan will have the same protections of other student loans of deferment, forbearance and loan forgiveness. However, the default will not be removed from your credit record.
Defining Delinquency Is Only the Beginning: Be Proactive to Avoid Student Loan Delinquency
Once again, the definition of delinquency is just being late on paying your student loan. But if you become delinquent for 270 days, your loan goes into default. Federal student loans and even many private ones, have protections for those who are having trouble paying. So, don’t ignore the delinquency notices and throw them in a drawer. Before you even become delinquent, if you are struggling to pay, contact your loan holder to find out what help you can get during a difficult time.