Student loan default occurs when your loan is delinquent for a period of time specified by the lender. How long it takes to go into default depends on the type of loan you have. Under most federal direct loan programs, you’re considered in default if you don’t make your payments on time for more than 270 days, about nine months.
Delinquent vs. Default
These two concepts are often misunderstood and many think they are the same. But as a borrower, you need to understand the very important differences between delinquency and default.
Your loan is delinquent when any payment is even one day late. If you’re short on cash one month and don’t make your monthly installment but then you jump back in the next month and make your regular payment, your account is still considered delinquent because of the missed month. You must make that extra payment or make some other agreement with the lender to get out of a delinquent status. You can communicate with the loan servicer about possibly changing payment plans or setting up a deferment or forbearance.
If your loan stays delinquent for longer than 90 days, the servicer reports that to the credit bureaus. That damages your credit score, making it more difficult to buy a house or car with financing or to get a credit card.
Every type of loan has its own terms of how long it takes for a delinquent loan to go into default status. Read your loan documents carefully so that you understand those definitions. If your loan is a William D. Ford Federal Direct Loan or a Federal Family Education Loan Program, then your loan is in default if you don’t make your payments on time for at least 270 days. A Perkins Loan gives the lender greater latitude because they can call the note in default any time you don’t make your scheduled payment on time.
Here are a few of the possible consequences of your loan going into default:
- Through a process called acceleration, the entire loan balance, including principal and interest, is due immediately.
- You lose access to a deferment or forbearance and you can no longer change your repayment plan.
- You become ineligible for any further federal student assistance.
- The default status of the loan is reported to the credit bureaus, which damages your ability to borrow money.
- The lender can use a treasury offset to seize your tax refunds and apply them toward your loan.
- Your wages can be garnished, meaning the government orders your employer to withhold part of your pay as payment on the loan.
- You may have to go to court and pay all the fees and costs associated with that.
- Your school can choose, at its sole discretion, to withhold your transcript until the default is cleared up.
How to Avoid Default
If you’re struggling to make your payments on a federal student loan, the most important thing is to communicate with your loan servicer. That’s the company or agency that handles your loan for the lender. If you don’t know who that is, you can find it on your loan paperwork or online. Sometimes it’s your school and sometimes it’s another entity. If you can make arrangements with the servicer before the loan goes into default, you’re in a stronger position.
What to Do if You Are Already in Default
Again, it’s all about communication. Even if your loan is already in default, it’s not too late to contact your loan servicer and try to work out some arrangement. Explain your situation and see what your options are for getting out of the default situation. The sooner you do this, the more likely it is that the lender can work out a solution with you.
What to Do if your Loan was Placed in Default by Mistake
It’s not common, but there are circumstances where loans are placed in a default status by mistake:
- Your loan should be in deferment because you’re still in school, but the servicer has inaccurate information about your enrollment.
- You were approved for forbearance or deferment, but the servicer has inaccurate dates.
- You made payments that weren’t credited to your account or were recorded inaccurately.
If you’re facing one of these situations, gather all your relevant documentation and present it to the servicer as soon as possible.
Paying your student loans on time every month is an excellent way to establish good credit, but sometimes difficult things happen. Always communicate with your servicer when you’re having trouble making your payments to avoid default. If you do find yourself in default, speaking with your servicer is still the best course of action to work your way through it.