Although some borrowers may not realize it, student loan debt is a personal financial liability that needs to be viewed like any other financial obligation -- and with the same sense of urgency as other payments.
The reality is that missing student loan payments can hold you back financially just like missing credit card or car payments will. A student loan is considered delinquent the first day after you miss a payment; if the delinquency lasts more than 90 days, your loan servicer, which handles the billing and other services for your loan, will report it to the three major national credit bureaus, which will lower your credit score.
Here's what borrowers should keep in mind about delinquent student loans and their consequences.
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.
Student Loan Delinquency vs. Default
Borrowers should be sure to understand the difference between student loan delinquency and default. The first day after a missed payment, a federal student loan is considered delinquent, and within weeks of missing a payment, your loan servicer can start assessing you late fees. These late fees are typically around 5% of the payment, depending on your servicer.
The student loan remains delinquent until you repay all past due payments. The loan is typically considered to be in default if you don't make payments for at least 270 days, or about nine months, at which time the account is usually sent to collections.
Once your federal student loan goes into default, there are many consequences, including that your employer may withhold a portion of your salary and send it to the loan holder.
Student Loan Delinquency on a Credit Report
Allowing student loans to go delinquent can often have a compounding negative effect on credit scores and reports due to the fact that each loan is reported individually.
For example, it's common for someone who attended college for four years to have multiple separate loans on their credit report, rather than showing one large loan total. This can cause multiple negative events on the credit report for each month that a payment is missed.
Even if loans are consolidated, they are likely still reported to the bureaus individually on a disbursement by disbursement basis. The good news is that this also allows for a fairly quick boost to scores when a consolidated student loan is brought current and paid on time each month.
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.
My Student Loans Are Delinquent -- Now What?
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 circumstance.
Once federal student loans have gone into default status, there are still options to recover, namely, loan rehabilitation and loan consolidation.
Under rehabilitation, to get out of default, the borrower agrees to a reasonable payment amount with the loan holder and makes nine payments over 10 consecutive months.
Consolidation is different, and allows a borrower to pay off one or more federal student loans with a new consolidation loan. To qualify, a borrower must either agree to repay the new direct consolidation loan under an income-driven repayment plan, or make three consecutive monthly payments on the defaulted loan before it is consolidated.
For the damage that may have already been done from past missed payments, take simple steps to balance your credit report with positive on-time payments. For example, try taking advantage of a secured credit card by charging only minimal amounts on it and then immediately paying the balance off.
Recovering fully from delinquency or default won't happen overnight, but diligence with future payments and attention to all available options can eventually get you back on track.
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