When a borrower fails to make payments by the due date, their student loan may be reclassified to a dreaded “d” category — delinquency or default.
A student loan is delinquent if any payments are past due. Delinquent loans may result in additional fees and damage to the borrower’s credit.
If the borrower does not get up to date on their payments, the student loan eventually is placed in default. Once in default, the unpaid balance and interest are due immediately, and the borrower is subject to host of negative consequences.
Any borrower struggling to make their student loan payments should contact their loan servicer before skipping a payment.
When is a student loan delinquent?
A student loan is considered delinquent the first day after a missed payment. Once a payment is skipped, the loan remains delinquent until all past due payments are made. For example, if a borrower misses a payment and then resumes making regularly scheduled payments the following month, the loan is still considered delinquent until the skipped payment and any associated late fees are paid or other arrangements are made (e.g., forbearance, new payment schedule).
Loan servicers typically send loan status reports to one or more of the three national credit bureaus (Equifax, Experian and TransUnion) on a monthly basis. However, this does not mean a student loan shows up as delinquent on the borrower’s credit reports right away following a missed payment.
Private lenders usually report a student loan as delinquent once payment is over 60 days past due. However, some lenders may report the loan as past due when it is as few as 30 days late.
Loan servicers of federal loans do not report a loan as delinquent until it is more than 90 days past due. At this point, it is considered a serious delinquency — the loan is viewed to be in danger of default. About 10% to 15% of federal student loans are in a serious delinquency.
Federal student loan servicers are required to provide written notice to the borrower within 15 days of a loan becoming delinquent. If the borrower simply forgets to send in payment, receipt of this notice can remind them to bring the loan current before the servicer reports the delinquency to the credit bureaus.
When a student loan is reported as delinquent to the credit bureaus, it will affect the borrower’s credit scores. A single late payment can cause a 50-100 point drop in the borrower’s credit scores.
When is a student loan in default?
If a loan remains delinquent for an extended period of time it may be placed in default.
The point at which this occurs depends on the type of loan. When a default is claimed by the loan servicer or lender, the entire loan balance and unpaid interest becomes due and the lender may take legal action to get repaid.
Private student loans typically go into default if they are 120 days delinquent.
Federal student loans are considered to be in default if no payment has been made for at least 270 days. But, lenders of loans in the Federal Family Education Loan (FFEL) program loans usually wait until the end of the 90-day period during which they are allowed to claim default — effectively delaying the default declaration until the loan is 360 days delinquent. (New FFEL program loans have not been made since the program ended on June 30, 2010.) Federal Direct Loans are considered to be in default 360 days since the last payment was made.
What are the consequences of delinquency and default?
Delinquency and default ultimately make student loans more expensive, and it can take years for a borrower to recover from the damage to the borrower’s credit.
Late fees can be assessed on delinquent payments — these are typically a percentage of the missed payment amount, such as six percent for federal student loans. The grace period for avoiding a late fee is 30 days past the due date for Federal Direct Loans and 15 days past due for FFEL program loans. Grace periods for private student loans are often 15 days but may vary.
Delinquent private loans forfeit any interest rate discounts received for consistent payment.
After a private loan is delinquent, the lender will seek repayment from the cosigner, if there is one.
At the time of default, all accrued but unpaid interest on a student loan is capitalized. This means the borrower starts being charged interest on unpaid interest, adding to the cost of the loan.
Interest continues to accrue on loans in a delinquency or default. Some borrowers incorrectly assume that interest stops when the borrower skips payments.
Defaulted loans are also subject to collection charges that may be substantial relative to the unpaid balance. Collection charges on defaulted federal student loans typically deduct as much as 20 percent of each payment before the remainder is applied to the interest and principal balance of the loan. This means that the loan payoff amount may be as much as 25 percent higher when collection charges are added to the loan balance. (Collection charges may be reduced to 16 percent or waived entirely if a borrower rehabilitates a defaulted federal student loan.)
The longer a student loan is delinquent, the greater the damage to the borrower’s credit score. Delinquency hurts the borrower’s ability to obtain additional loans and raises the interest rates on any loans they are eligible to receive. For example, the interest rate on an existing credit card can be increased for new purchases following 45 days’ notice from the card issuer.
Default comes with even more serious consequences. The default is reported to the credit bureaus and the damage to the borrower’s credit may prevent them from obtaining many types of loans, including a FHA or VA home mortgage.
Defaulted federal student loans are no longer eligible for deferments or forbearances, and the borrower is ineligible for additional federal student aid. Colleges may withhold official academic transcripts from defaulted borrowers. Defaulted student loans may subject the borrower to wage garnishment and asset seizure. The federal government may seize federal and state income tax refunds and lottery winnings and offset Social Security benefit payments to repay defaulted federal student loans. Further, defaulted student loans are very difficult to discharge through bankruptcy.
Don’t Miss a Payment
Auto-debit is a must for any student loan borrower that may forget to make payments. It even comes with an interest rate reduction of 0.25 or 0.50 percentage points for most loans.
If a borrower has trouble making their monthly student loan payments, they should contact their loan servicer immediately. The borrower may be able to temporarily postpone or reduce payments. Federal student loans may be switched to an income-driven repayment plan.