The Harsh Realities of Student Loan Delinquency and Default

Student Loan Delinquency and Default – Why You Want to Avoid It

You have probably seen the protests on the news about student loan borrowers refusing to pay their loans unless Biden forgives student loan debt. Obviously those borrowers are not concerned about student loan delinquency and default.

Not making your minimum monthly payment can bring on a whole lot of financial and emotional trouble. It doesn’t matter if you are just flat out refusing to pay or if you are sincerely struggling to make payments. In this blog post I will share what student loan delinquency and default are and why and how you can avoid it.

Definitions of Student Loan Delinquency and Default

Student Loan Delinquency

Student loans can receive a delinquency status the next day after the due date if payment is not received. That delinquent status will remain until payment is received.

If payment is not made within 90 days of the due date then your loan servicer may report your missed payments to the credit bureaus (Equifax, Experian and TransUnion) as delinquent.

Student Loan Default

If your loan remains in delinquent status for over 270 days it could go into default status. Once you go into default status a whole slew of negative consequences can occur and it can be harder to get out of default status and into good standing on your loans.

[With federal student loan payments resuming again in October 2023 after a 3 year pause due to the CARES Act, the White House recognizes that this could put a lot of borrowers into delinquent and default status if they are not prepared.  The administration has implemented a 12 month “on-ramp” period from October 1, 2023 to September 30, 2024.  During this period borrowers will not be reported as delinquent or default.  Therefore they will not be reported to the credit bureaus or collections agencies. In a press conference Biden urged borrowers to make payments if they can.  If you can’t make payments you should still seek out other payment programs.]

The Negative Financial Consequences

Accrued Interest and Fees

Interest continues to accrue on your loans, which means ignoring payments can make your balance even higher.

Your loan servicer may even demand that all your interest and full balance be paid at once. This is called acceleration.

Credit Score Damage

If you are reported to the credit bureaus then your credit score can take a big hit. This could make it more difficult to get a mortgage and/or make your interest rate higher. It could also make it harder to get a lower interest rate if you were able to refinance other loans.

Collection Agency Harassment

Your loan servicer will constantly be asking you for your payment but if you ignore them for a certain amount of time they will pass it along to collection agencies. Collection agencies do not have a history for being pleasant and understanding. Anyone who has dealt with collection agents can attest to this. You want to avoid them at all costs.

Wage and Tax Refund Garnishments

Going into default can put you at risk for having your wages garnished. They can collect up to 15% of your disposable pay (the remaining amount after other deductions). This is set up through your employer, therefore the money is taken out of your gross pay before you receive your paycheck.

They can also withhold tax refunds.

Professional License Suspension

Some professions require a special license to work in the field. Depending on your field and your state, you could have your license revoked for defaulting on your loans. Losing your job because of student loan default can make it even harder to make payments on your loans.

Not good.

Each state and professional field is different. Here is a list of states that have passed legislation to suspend professional licenses for unpaid student debt:

Arkansas
California
Florida
Georgia
Hawaii
Iowa
Louisiana
Massachusetts
Minnesoda
Mississippi
South Dakota
Tennessee
Texas

Ineligible for Other Repayment Plans

There are several programs available that help student loan payments be more affordable but if you go into delinquent or default status you could lose your eligibility to apply for those programs.

emotional consequences of student loan delinquency and default

The Emotional Consequences of Delinquency and Default

Stress and Anxiety

When bills are piling up and collection agents are calling it can become very stressful. That is just additional stress on top of the stress of other financial strain.

Strained Relationships

When you are stressed about money that can also put a strain on relationships. Money is one of the leading causes of divorce in America.

Delaying Other Goals

A lot of student loan borrowers have said that they are delaying other life goals such as getting married, buying a house or starting a family because of student loans. If you go into default this can delay things even more.

Avoiding Student Loan Delinquency and Default

Make a Plan

Knowing your payment dates and minimum payments and planning them within your budget is an important part to staying current on your student loans.

Make a zero-based budget every month that accounts for all your expenses. Account for your basic needs first, (housing, utilities, food and transportation). Making sure your family is taken care of first and foremost will relieve some of that stress.

Then you want include other necessary expenses and your minimum payments on each loan. If the budget is really tight then cut out any unnecessary expenses like cable, subscriptions you’re not using and eating out.

Clear Communication

If you are going through a financial hardship and can’t make your minimum payments then clear communication with your loan servicer is your safest option for staying out of delinquency and default.

There are a lot of programs that can help you make a manageable payment or temporary pause (deferment) that won’t put you into delinquent or default status. Talk with your loan servicer while you are still current on your loans to make a plan going forward.

Conclusion

As you can see, going into student loan delinquency and default has a negative trickle effect on your life and it’s best to avoid it.