When used correctly, student loans can be your best friend. Delinquency and default can happen if you miss student loan payments because you forgot about them, can’t afford the cost, or face a different repayment issue. These two loan statuses are different, but one thing they both share is consequences.
Delinquency: The Slippery Slope
Everyone knows that anything that sounds even vaguely like "delinquent" is best avoided. In the context of student loans, delinquency occurs when you fail to make a loan payment (yes, even just one payment) on time.
The longer the delinquency lasts, the greater its effect on your financial life. After 15 days, your lender can assess late fees of up to 6% for each delinquent dollar for federal student loans (it can be higher for private loans, so check your promissory note to be sure)—increasing the amount you owe. And after 60 to 90 days, your credit may start suffering as consumer reporting agencies begin getting notices about your past-due student loans.
To get your student loan back in good standing, you need to make all the payments you've missed. If you don't take any action, delinquency can lead to default.
Being past due on any federal student loan payments for 270 days (roughly 9 months) can land you in the last place you want to be: default. Default can come sooner for some federal loans (like for health professionals) and for private loans, too.
Default means that you've broken the initial loan agreement, which comes with serious consequences. These can include collection costs, wage garnishment, and seizure of your tax refunds—not to mention the damage a default can do to your credit score. If your loan does default, you can recover; however, your best bet is to avoid this situation altogether.
Avoiding Delinquency And Default
Paying back student loans can be tough, and it's not always easy to stay on top of payments. If you're struggling with your payments and worrying about your loans going into delinquency or default, take preventative action as soon as possible.
For federal student loans, you can find a more manageable payment plan, or sign up to postpone your monthly payments through either deferment or forbearance. While your loan is in deferment or forbearance, no payments are due. That can give you time to catch up. You may be able to back-date payments so they cover ones you missed, allowing you to get your loan current without making a big lump payment. You can also consider applying for an income-driven repayment plan, which is a longer-term solution if you continue to struggle with your payments. This isn’t an option after the loans are in default, so act early.
In either case, your first step should be to contact your loan holder. They can walk you through the various options that may be available to you. If you don't know who holds your federal student loans, you can find out by visiting the National Student Loan Data System (NSLDS®). For your private loans, you'll need to pull your credit report to identify your loan holder. You can do this once every 12 months for free at AnnualCreditReport.com.