Millions of students a year invest in their futures by taking out federal loans to go to college. For many, these loans will prove a worthwhile investment. However, far too many borrowers struggled with repayment even before the COVID-19 pandemic hit, with more than a million entering default in 2019 alone.
Because of the pandemic, the federal government provided key financial relief for most federal student loan borrowers by pausing interest and payments and stopping collections on defaulted loans. While the U.S. Department of Education has signaled plans to make borrowers resume repayment in February 2022, there are indications that the federal government may provide further relief for borrowers who were in default prior to the pandemic.
Meanwhile, here’s a timeline of what happens when a borrower becomes delinquent and then defaults on a federal direct student loan — and how to protect yourself from the resulting financial harm.
Payment up to 90 Days Past Due
One day after you miss a payment, the loan is considered past due, or delinquent. It will remain delinquent until you either repay the past due amount or take steps to change your payment obligations. You may be charged late fees above and beyond the interest that continues to accrue on the principal owed.
If you are unable to make your full monthly payment, contact your student loan servicer immediately and ask for help. If you need to lower your monthly payment amount, you may qualify to enroll in a more affordable income-driven repayment plan. You can also explore putting your loan into deferment or forbearance.
[Read: Student Loan Interest Capitalization — What to Know]
90 to 269 Days Past Due
If your student loan reaches 90 days past due and you haven’t made arrangements, the delinquency will be reported to the three major national credit bureaus. This can lower your credit score, which can affect your future financial life, including your ability to take out a home mortgage or auto loan, rent an apartment or qualify for a credit card.
Updates on your delinquent loan are reported to consumer agencies every 30 days. You will receive ongoing communication from your loan servicer regarding the past-due loan, and you may also be charged additional late fees as time goes on.
Once the loan is 240 days past due, your servicer will send you a final demand letter requesting payment of the full loan balance within 30 days.
270 or More Days Past Due
Federal direct loans enter default at 270 days past due. Once that happens, you’ll face a number of new consequences.
The full unpaid balance of your loan, including any unpaid interest, becomes immediately due and you can no longer access protections such as income-driven repayment, deferment or forbearance.
You may also have your wages garnished and have tax refunds and federal benefit payments withheld and applied to the balance of the defaulted loan. In addition, you may be taken to court and charged associated fees, including court costs, collection fees and attorney fees. Some states may also deny, suspend or revoke certain professional licenses as a penalty for student loan default.
[Read What to Do When Your Tax Refund Is Seized for Student Loan Default.]
You also lose eligibility for additional federal student aid, including Pell Grants. This is especially devastating for those who carry debt from a program that they didn’t complete and now have fewer options to re-enroll, complete their degree and increase their earnings. Colleges typically withhold a borrower’s academic transcript if he or she owes the school money, making it difficult to transfer earned credits to another school.
Student loan default comes with severe and long-lasting consequences. Many view these consequences as overly punitive and self-defeating, and consumer advocates are working to reform the system. However, it’s critical for borrowers to understand the potential devastation that can come from defaulting on a federal student loan and seek help before the default happens.
How to Stay Out of Default
The federal student loan system can be difficult to manage, and many borrowers struggle to make their monthly payments not because they don’t want to make payments, but because they simply cannot afford them.
If that’s your struggle, contact your student loan servicer and make a plan. There are numerous options, including income-driven repayment plans that tie a borrower’s monthly payment amount to his or her income and family size and often reduce monthly payment amounts.
[Read: How to Manage Old, Unpaid Student Loans]
You can also get shorter-term relief with a forbearance or deferment, which pauses loan payments for a time. While it’s best not to use these options for a lengthy period, as interest may continue to accrue, they are key safety nets to keep in mind if you’re struggling financially. To see if you qualify for any of these options, contact your student loan servicer.
What to Do if You’re in Default
If you were in default before the pandemic, stay up to date on the latest news from the Education Department. You can also explore ways to get out of default, including via loan consolidation or rehabilitation.
For example, if you were in the process of rehabilitating a defaulted student loan when the relief period began, each month of suspended payments counts toward rehabilitation.
It’s also important to know your consumer rights. Debt collection for student loans is regulated by federal law, which makes it illegal for a lender or other debt collector to mislead or harass you. They can’t engage in illegal practices and are required to validate that you owe the debt they’re attempting to collect.
If you think your rights are being violated by a debt collector, report it to a governmental agency such as your state attorney general’s office, the Federal Trade Commission or the Consumer Financial Protection Bureau.
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Federal Student Loan Delinquency, Default Consequences: A Timeline originally appeared on usnews.com
