Student Loan Delinquency

If you missed any scheduled payment towards your loans then you are delinquent on your student loans. Know more upon how delinquency can affect your credit history, how it leads to default and much more.

Updated by Kirtika Acharya on 26th August 2020

Student loan repayment is an essential 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 not to miss any payments, once you do miss a payment you become delinquent on your loans, which can also lead to default. Here is an inside and out examination on student loan delinquency and what you can do to prevent it. Let’s find out if being delinquent leads to default?

Table of contents

Understanding delinquency 

It's essential to pay the amount shown on your bill and pay by the due date.

The first day after you miss a student loan payment, your loan gets past due or delinquent. Your loan record remains delinquent loan until you repay the past due amount or make different courses of action, for example, deferment or forbearance, or changing repayment plans.

If you have a delinquent loan 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 keep on being delinquent, your loan can risk going into default. Try not to overlook 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.

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Student loan Delinquency vs Default

A student loan is viewed as 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 delinquent loan 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. 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 delinquent loan 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 proceed to a 181-270 day delinquency. 

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. It reports 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 outstanding loan dollars written off during the previous year. Most defaults occur within the first 4-5 years of repayment.

Private student loans will in general have lower delinquency and default rates than government student loans since private student loans are credit-guaranteed. At the point, 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

Being late on a payment once or twice may not dramatically impact your financial situation right away, but it can affect your credit score. The quick outcome might be the loss of advantages on your loans, like interest rate discounts.

Facing delinquency on your student loans for an extended period —  and inevitably entering default — will probably cause your credit score to drop drastically. 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 severe 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 charging additional fees to cover collections and court costs.

When and how will my credit score be affected?

A delinquent student loan is normally answered to the credit authorities following 90 days of missed installments. In the event that a loan keeps on being delinquent and goes into default, the default will be accounted for to the authorities.

Thus, a borrower's credit score will be brought down, however, the amount can differ. This is on the grounds that a credit score estimation depends on a wide scope of components like records, credit usage, requests, sorts of records, and installment history.

Falling behind on a student loan may bring down one individual's score by only a couple of focuses, while another borrower may see many focuses drop off their score for a similar number of missed installments.

How to get out of student loan delinquency and default?

Getting out of delinquency requires a relatively 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 defaulting 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 cash.

  • For more significant 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 newly 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 there, and there are steps you can take to get out of delinquency.

This would be an excellent time to reach out to your loan servicer about adjusting your repayment plan or even requesting forbearance or deferment, options that allow you to stop making payments or reduce the amount you pay temporarily. The availability of these options will depend on your circumstances.