Janice Lozano
Student loan payments can be a tricky business, and missing a payment by even one day can have consequences. While it might not be the end of the world, it's important to understand the potential impact on your financial situation and credit score. Private lenders may consider your account delinquent after one missed payment, and late fees may apply. Federal loans, on the other hand, offer a six-month grace period after graduation before payments are required. Understanding the options available, such as adjusting your repayment plan, applying for deferment or forbearance, or seeking loan rehabilitation, can help you navigate missed payments and maintain your financial stability.
| Characteristics | Values |
|---|---|
| What happens when you miss your student loan payment? | It depends on whether you have federal or private loans. |
| Grace period | If you have direct subsidized or unsubsidized federal loans, you get a six-month grace period starting after graduation. |
| Delinquency | Your loan becomes delinquent immediately after you miss a payment. |
| Late fees | Private lenders charge late fees of around 5-6% of the past-due amount. |
| Credit score impact | If your payment is 90 days late, the major credit agencies will be notified, which can decrease your credit score. |
| Default | If your payment is 270 days late or more, your loan is considered to be in default. |
| Loan rehabilitation | If your federal student loan is in default, you can agree in writing to make nine monthly payments within 20 days of their due date. Once you make all nine payments, your loans are no longer in default, but the late payments will stay on your credit report. |
| Collections | The lender may sell the debt to a collection agency, which will aggressively pursue payment. |
| Wage garnishment | If your lender sues you and gets a court order, they may be able to garnish your wages to collect the debt. |
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What You'll Learn
Late fees and delinquency
The consequences of late fees and delinquency can vary depending on the type of student loan you have. For federal student loans, a late payment within 90 days of the due date may not be reported to the three major national credit bureaus. However, if your payment is more than 90 days late, your loan servicer may report it, negatively impacting your credit score. Federal loans also offer a six-month grace period after graduation before repayment begins.
Private student loans, on the other hand, may have different standards for delinquency and late fees. Some private lenders may report late payments immediately to credit bureaus, resulting in a decrease in your credit score. Additionally, private lenders often charge late fees, typically around 5% of the past-due amount.
It's important to remember that the longer you delay payments, the harsher the consequences. If you continue to be delinquent on your student loans, they will eventually default. Defaulting on your loans can have serious repercussions, including the entire unpaid loan balance becoming immediately due, a drop in your credit score, and ineligibility for additional federal student aid.
To avoid late fees and delinquency, consider setting up automatic payments, which can also give you a discount on your interest rate. Additionally, if you're struggling to make payments, reach out to your loan servicer to discuss alternative repayment plans, deferment, or forbearance options. Taking proactive measures can help you stay on top of your student loan repayment and maintain your financial health.
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Credit score impact
Paying your student loan instalments on time is crucial for building your credit score. Late or missed payments will hurt your credit score and may also affect your chances of getting future student aid or loans.
For federal loans, if you're one day late, your student loan status goes to delinquent. Your lender will report your delinquency to one or more of the major credit bureaus after 90 days, and your credit score will likely decrease. With private loans, lenders may report late payments after just 30 days. If you do not correct the delinquency, it may stay on your credit report for seven years, hindering your ability to get a new credit card or causing your interest rates to rise on current cards.
The longer your credit history, the stronger your credit score may be. For many people, student loans are their first experience with debt repayment, helping them establish a long credit history before taking out larger loans, like mortgages. Student loans can impact all five components of your credit score: payment history, length of credit history, credit mix, amounts owed, and recent applications. Payment history is the most important factor, accounting for 35% of your credit score. The more overdue your payment, the worse the damage to your credit. After 270 days of non-payment, your loan status moves from delinquent to default, which has a serious impact on your credit score.
However, late student loan payments should not tank your credit score. While missed payments will negatively affect your score, they are not as indicative of creditworthiness during unique circumstances such as the return to repayment after the pandemic. Additionally, if you consolidate your loans and apply via paper application to an income-based repayment plan, previous late payments will be removed from your report.
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Loan default and its consequences
Defaulting on a loan means failing to repay it according to the terms agreed upon in the promissory note. The consequences of defaulting on a loan can be severe and vary depending on the type of loan and the lender. Here are some potential consequences of loan default:
Credit Score Impact
Defaulting on a loan can significantly damage your credit score and rating, which can remain on your credit report even if you resolve the default status. A low credit score can make it difficult to secure future loans, housing, insurance, and even employment, as credit history is often reviewed by landlords and employers.
Loss of Federal Aid Eligibility
Defaulting on federal student loans can result in losing eligibility for additional federal student aid.
Higher Interest Rates
A history of loan default can lead to higher interest rates on future loans, as lenders may consider you a riskier borrower.
Collections and Lawsuits
Lenders may sell the debt to a collection agency, which can aggressively pursue payment, including taking legal action. This may include suing you in court to recover the funds, resulting in additional court costs and attorney fees.
Wage Garnishment
In the case of defaulted federal student loans, wage garnishment may occur. This means that a court can order your employer to withhold a portion of your wages to repay the debt.
Collateral Seizure
For secured loans, where an asset such as a vehicle or property is used as collateral, the lender has the right to seize that collateral if you default.
Tax Consequences
If a portion of your debt is forgiven or cancelled, the forgiven amount may be considered taxable income, resulting in an unexpected tax bill.
Higher Insurance Premiums
In certain states, insurance companies use credit-based insurance scores to determine premiums. A default can lead to higher insurance rates for auto, home, or other types of insurance.
Difficulty in Opening Bank Accounts
Some banks use screening services to review applicants' financial histories when opening new accounts. A history of defaulted debts can make it challenging to open new bank accounts.
It's important to note that the specific consequences of loan default may vary, and it's always best to proactively communicate with your lender or loan servicer to discuss alternative repayment options or adjustments to your repayment plan if you are struggling to make payments.
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Loan rehabilitation and consolidation
Loan Rehabilitation
Loan rehabilitation involves taking steps to get defaulted loans out of default and restore them to repayment status. If your federal student loan is in default, you can agree in writing to make nine monthly payments (as determined by the loan servicer) within 20 days of their due date. You must make all nine payments within 10 months. Once you make all nine payments, your loans are no longer in default, and the default will be removed from your credit report. However, the late payments that led to the default will remain on your credit report. Additionally, wage garnishment only ends after making five rehabilitation payments.
Loan Consolidation
Loan consolidation involves applying for a Direct Consolidation Loan to pay off the defaulted debt. This option provides a fresh start by eliminating your current defaulted loans and providing a new loan. Consolidation can be faster than rehabilitation since it does not require making nine monthly payments. It also offers more repayment plan choices, including plans with longer repayment timelines, resulting in more affordable monthly payments. However, consolidation does not remove the default from your credit history, and you may incur additional collection costs.
It is important to carefully consider the pros and cons of loan rehabilitation and consolidation to determine the best option for your specific situation.
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Alternative repayment plans
Even if you set up automatic payments, you'll likely need to re-enrol if you have a new loan servicer. Setting up automatic payments will give you a 0.25% discount on your interest rate. If you're concerned about not being able to keep up with payments, talk to your loan servicer about your options, which may include alternative repayment plans, such as:
- Income-driven repayment plans - The U.S. Department of Education offers several different repayment options, including income-based repayment plans. The Pay As You Earn (PAYE) plan, for example, can cut your monthly payment to 10% of your discretionary income, calculated as the difference between your annual income and 150% of the federal poverty guideline.
- Deferment or forbearance - If you can't afford to pay your student loan, you can apply for loan deferment or forbearance, which will give you more time to pay.
- Graduated repayment plan - This plan starts with lower monthly payments that increase over time, ensuring that your loans will be paid in full within 10 years (or 30 years with consolidation loans).
- Extended repayment plan - If you have more than $30,000 in outstanding loans, you may qualify for an extended repayment plan. This option allows you to choose fixed or graduated monthly payments, ensuring that your debt will be paid off within 25 years.
- Student loan rehabilitation - If your federal student loan is in default, you can agree in writing to make nine monthly payments (as determined by the loan servicer) within 20 days of their due date. Once you make all nine payments, your loans are no longer in default, and the default will be removed from your credit report.
- Loan consolidation - Loan consolidation can help you get out of default and regain access to student loan forgiveness.
It's important to remember that the consequences of late payments can be serious, and the later your payments are, the harsher the consequences will be. Even a one-day delay can result in your lender marking your account as delinquent and reporting it to credit bureaus, which can decrease your credit score. After 90 days, the lender may consider you in default and take legal action. Therefore, it's best to contact your loan servicer as soon as possible to discuss alternative repayment plans if you're unable to make your monthly payments.
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Frequently asked questions
Your loan becomes delinquent, and your account may be marked as such by your lender. You may also be charged a late fee, which is usually around 5%-6% of the monthly payment.
This depends on the type of loan. For most loans, you can be 270 days late before your loan defaults. However, some private loans and Federal Perkins Loans can default after one missed payment.
The consequences of defaulting on your loan include:
- The entire unpaid loan balance is immediately due.
- Your credit score will drop.
- You will lose eligibility for additional federal student aid.
- Your wages may be garnished.
- You will be unable to apply for deferment or forbearance.
