As if dealing with your student loan debt wasn’t bad enough, all the confusing rules and terms around repayment just add insult to injury.
Reading through the requirements can feel like trying to translate a foreign language. And added difficulty isn’t exactly what you’re looking for when you’re already struggling to make your payments.
So if you’re dangerously close to missing a payment, or have missed payments, start here to understand the difference between student loan default and delinquency – and what you can do if you find yourself in either situation.
Defining student loan delinquency and default
When you signed the paperwork to borrow money for your college education, you agreed to be legally obligated to repay that money under a certain set of terms. Delinquency and default are both words used to describe some sort of failure to adhere to those terms.
If you miss a payment on your student loans, you’re considered delinquent. Even being a few days late technically means you’re in delinquency. Default occurs when you remain in delinquency for a set period of time. This usually happens when you’re delinquent for more than 270 days.
What’s the impact of student loan delinquency?
When you’re in delinquency, your student loan servicer will send you a notice if you’re more than 15 days late on your payment. Being late on a payment once or twice won’t dramatically impact your financial situation right away, but it can impact your credit score. The more immediate consequence may be the loss of benefits on your loans, like interest rate discounts.
Being delinquent on your loans for an extended period of time – and eventually entering default – will likely cause your credit score to drop dramatically. This makes you appear less creditworthy to financial institutions and will prevent you from receiving the lowest possible interest rates on other loans or even being approved at all.
This can be a serious issue in the future. It’s not easy to repair a credit score once it’s tanked, and defaulting on your loans can do serious damage. Being in default can also lead to more severe action on the part of your loan servicer.
Again, signing the loan when you borrowed the money put you in a legally binding agreement in which you promised to repay your balance. Defaulting could allow the loan servicer to garnish your wages or withhold any potential tax refunds until you repay the balance of the loan in full (And that balance becomes due in full when you default!)
Additional collection tactics can include taking Social Security benefits, refusing to issue new loans or grants, and even charging additional fees for demanding collections in default.
How to get out of student loan delinquency
Getting out of delinquency requires a fairly simple action: make your payment as soon as possible. This is simple – but not necessarily easy if you’re struggling to make at least the minimum payment.
Dealing with student loan default
If you find yourself in default on your student loans, you have a few options for getting yourself out of the situation. The first is to repay your loan in full. This might be realistic if the loan is a few thousand dollars and you’re able to come up with the cash.
But for larger balances, you might need to consider student loan rehabilitation. The federal government offers a few programs for rehabilitation, but this might not be the best route depending on what type of student loan debt you have.
A final option is loan consolidation. This wouldn’t magically disappear all the money you owed. in fact, consolidation means taking out another loan, repaying the original loans with the new borrowed funds, and starting a new payment plan with the new loan.
Avoiding falling behind on your student loan payments
These are ways you can remedy the situation once you find yourself in it. But the best course of action is to avoid both delinquency and ultimately default altogether.
Set up a sound budgeting system so you’re efficiently managing your money each month. Then work to save more and create a bigger gap between your income and your expenses, so you have enough cash flow to cover your student loan payments.
If you’re maxed out on how many costs you can cut and don’t know how to save any more, it’s time to look at increasing your income. You can start with your current job and seek to earn and negotiate a raise, or you can increase your workload and pick up a side hustle to earn extra cash.
What to do in the worst-case scenario
But sometimes, you simply do not have the money to make your payment. Thankfully, that doesn’t mean the immediate result is delinquency. Step one is to reach out to your loan servicer to understand your options.
“If you find yourself in a situation where your finances are tight, reach out to your loan provider,” advised Katie Gampietro Burke, CFP and founder of financial planning firm Wealth by Empowerment. You can avoid delinquency by doing things like changing your due date or even your payment plan as a whole.
There is always some step, however small or temporary, that you can take to avoid finding yourself in this situation. Don’t give up hope and don’t avoid doing anything at all.
“You may be eligible for deferment, forbearance, or a lower payment,” Burke adds. She points out that your worst option is to do nothing, as a lack of action can lead to serious consequences for your financial situation.
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