Student loan repayment is an important phase for every borrower. Once you are well aware of your repayment options available to you, you can build your credit score and improve your credibility as a borrower.
It is advised to do your best to not miss any payments, once you do miss a payment you become delinquent on your loans, which can also lead to default. Here is an in-depth study on student loan delinquency and what you can do to prevent it. Will being delinquent lead to default? Let’s find out.
Table of contents
- Understanding Delinquency
- Understanding Default
- Student loan Delinquency vs Default
- Impact of student loan Delinquency and Default
- My student loans are delinquent Now-What?
It's important to pay the amount shown on your bill—and to pay by the due date.
The first day after you miss a student loan payment, your loan becomes past due, or delinquent Your loan account remains delinquent until you repay the past due amount or make other arrangements, such as deferment or forbearance, or changing repayment plans.
If you are delinquent on your student loan payment for 90 days or more, your loan servicer will report the delinquency to the three major national credit bureaus. If you continue to be delinquent, your loan can risk going into default. Don’t ignore your student loan payments—defaulting on your loan can have serious consequences.
It should be noted that Credit bureaus may be called "consumer reporting agencies" on the promissory note you signed before receiving your loan.
If your loan continues to be delinquent, the student loan may go into default. The point when a loan is considered to be in default varies depending on the type of loan you received.
For a loan made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you’re considered to be in default if you don’t make your scheduled student loan payments for at least 270 days.
For a loan made under the Federal Perkins Loan Program, the holder of the loan may declare the loan to be in default if you don’t make your scheduled payment by the due date.
If you defaulted on any of your federal student loans, contact the organization that notified you of the default as soon as possible so you can explain your situation fully and discuss your options. If you make repayment arrangements soon enough after your loan has gone into default, you may be able to resolve the default quickly.
Student loan delinquency rate
Student loans currently have the highest 90-plus day delinquency rate of any household debt in the U.S., far higher than car loans and mortgages. In the first quarter of 2019 student loan debt reached $1.49 trillion, according to the Federal Reserve Bank of New York, up $29 billion from the fourth quarter of 2018.
Notably, 10.9% of total student debt in the first quarter of this year was 90-plus days delinquent or in default. Apply some simple math and you can quickly see that there are hundreds of billions of dollars in seriously delinquent or defaulted student loans out there. These debts are dragging down the credit scores of people all over the country and having a negative impact on the creditworthiness of many borrowers.
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Student loan Delinquency vs Default
A student loan is considered delinquent when the borrower does not make a payment by the due date. Most lenders report delinquency to credit bureaus when the loan is 30 or more days past due.
Serious delinquency occurs when the borrower is 90 or more days past due. Serious delinquency indicates a significant likelihood that the borrower will default on the loan.
A student loan is considered to be in default when the borrower fails to make a required loan payment for an extended period of time. Federal student loans go into default when they are 270 days delinquent. (Technically, a federal student loan is not in default until it is 360 days delinquent since the lender has 90 days to file a default claim and most lenders wait until the end of the claim period.) Private student loans are in default when they are 120 days delinquent.
Not every delinquency will progress to a default. For example, about two-thirds of borrowers who are 31-90 days delinquent on federal student loans will progress to a 91-180 day delinquency, about two-thirds of those will progress to a 181-270 day delinquency and about two-thirds of those borrowers will go into default. Ultimately, about a quarter of federal student loan borrowers with a 31-90 day delinquency will eventually default on their student loans.
Federal student loans report defaults as part of a cohort default rate. The cohort default rate is a short-term default rate measure, reporting the percentage of borrowers entering repayment in one federal fiscal year who default by the end of the second following federal fiscal year. Cohort default rates are about half of the long-term default rates. Private student loans report a charge-off rate, which is the percentage of loan dollars outstanding that were written off during the previous year. Most defaults occur within the first 4-5 years of repayment.
Private student loans tend to have lower delinquency and default rates than federal student loans because private student loans are credit-underwritten. When financial aid and federal student loans aren't enough to cover all costs, consider financing the gap with private student loans. Shop around to find the loans that best fit your needs.
Impact of student loan delinquency & Default
Being late on a payment once or twice may not dramatically impact your financial situation right away, but it can impact your credit score. The immediate consequence may be the loss of benefits on your loans, like interest rate discounts.
Facing delinquency on your student loans for an extended period of time — and eventually entering default — will likely cause your credit score to drop dramatically. This makes you less creditworthy to financial institutions and prevents you from receiving the lowest possible interest rates on other loans or even being approved.
This can severely impact your financial future. It’s not easy to repair a credit score once it has 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, when you signed the loan and borrowed the money, you have entered into a legally binding agreement under which you promised to repay your balance. Defaulting could allow the loan servicer to garnish your wages. Any tax refunds could be withheld 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 federal student loans or grants, and even charging additional fees to cover collections and court costs.
When and how will my credit score be affected?
A delinquent student loan is typically reported to the credit bureaus after 90 days of missed payments. If a loan continues to be delinquent and goes into default, the default will be reported to the bureaus.
As a result, a borrower's credit score will be lowered, though the amount can vary. This is because a credit score calculation is based on a wide range of factors like number of accounts, credit utilization, inquiries and types of accounts, in addition to payment history.
Falling behind on a student loan may lower one person's score by just a few points, while another borrower may see dozens of points drop off their score for the same number of missed payments.
How to get out of student loan delinquency and default?
Getting out of delinquency requires a fairly simple action: Make your payment as soon as possible. But it’s not necessarily easy if you’re struggling to make at least the minimum payment.
If you find yourself in default on your student loans, you have a few options for resolving the situation:
The first option is to repay your loan in full. This might be realistic if the loan amount is a few thousand dollars and you’re able to come up with the cash.
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. Plus, it could take months to resolve.
A final option is loan consolidation. This wouldn’t magically make all the money you owe disappear; it just simplifies your repayment strategy and may lower your monthly payments. Student loan 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.
My student loans are delinquent, now what do I do?
Once payments are missed and a student loan is delinquent, all hope is not lost and there are steps you can take to get out of delinquency.
This would be a good time to reach out to your loan servicer about the possibility of adjusting your repayment plan, or even requesting forbearance or deferment, options that allow you to temporarily stop making payments or reduce the amount you pay. Availability of these options will depend on your individual circumstances.