As if dealing with your student loan debt wasn’t bad enough, confusing rules and terms around repayment can just add insult to injury. Reading through the requirements can feel like trying to translate a foreign language.
For example, although the terms student loan delinquency (when you miss a payment) and default (when you miss payments for an extended period of time) may sound similar, they’re different. Each comes with varying consequences.
If you’re dangerously close to missing a student loan payment or have missed multiple payments, start here to understand the difference between student loan delinquency and default — and learn what you can do if you’re facing either situation. Let’s look at…
- Defining student loan delinquency and default
- What is the impact of student loan delinquency and default?
- How to get out of student loan delinquency and default
- Avoiding falling behind on your student loan payments
- What to do in the worst-case scenario
When you signed the paperwork to borrow money for your college education, you agreed to be legally obligated to repay that money under a certain set of terms. Default and delinquency on student loans are both terms used to describe some sort of failure to adhere to those terms.
If you miss a payment on your student loans, you’re considered delinquent. The day after you miss your payment, you technically are in delinquency.
Default occurs when you remain in delinquency on student loans for a set period of time. This usually is when you’re delinquent for more than 270 days. Perkins loan borrowers are an exception; they may go into default the day after missing a payment.
Being late on a payment once or twice may not dramatically impact your financial situation right away, but it can impact your credit score. The more immediate consequence may be the loss of benefits on your loans, like interest rate discounts.
Facing delinquency on your student loans for an extended period of time — and eventually entering default — will likely cause your credit score to drop dramatically. This makes you less creditworthy to financial institutions and prevents you from receiving the lowest possible interest rates on other loans or even being approved.
This can severely impact your financial future. It’s not easy to repair a credit score once it has tanked, and defaulting on your loans can do serious damage. Being in default can also lead to more severe action on the part of your loan servicer.
Again, when you signed the loan and borrowed the money, you entered into a legally binding agreement under which you promised to repay your balance. Defaulting could allow the loan servicer to garnish your wages. Any tax refunds could be withheld until you repay the balance of the loan in full — and that balance becomes due in full when you default.
Additional collection tactics can include taking Social Security benefits, refusing to issue new federal student loans or grants, and even charging additional fees to cover collections and court costs.
Getting out of delinquency requires a fairly simple action: Make your payment as soon as possible. But it’s not necessarily easy if you’re struggling to make at least the minimum payment.
If you find yourself in default on your student loans, you have a few options for resolving the situation:
- The first option is to repay your loan in full. This might be realistic if the loan amount is a few thousand dollars and you’re able to come up with the cash.
- For larger balances, you might need to consider student loan rehabilitation. The federal government offers a few programs for rehabilitation, but this might not be the best route depending on what type of student loan debt you have. Plus, it could take months to resolve.
- A final option is loan consolidation. This wouldn’t magically make all the money you owe disappear; it just simplifies your repayment strategy and may lower your monthly payments. Student loan consolidation means taking out another loan, repaying the original loans with the new borrowed funds and starting a new payment plan with the new loan.
The best course of action is to avoid both delinquency, and ultimately default, altogether.
Set up a sound budgeting system so you’re efficiently managing your money each month. Then work to save more and increase the gap between your income and your expenses, so you have enough cash flow to cover your student loan payments.
If you don’t have many expenses to cut and don’t know how to save any more money, it’s time to look at increasing your income. You can start with your current job and try to earn more and negotiate a raise, or you can increase your workload and pick up a side hustle to earn extra cash.
Sometimes, you simply do not have the money to make your payment. Thankfully, that doesn’t mean the immediate result is delinquency. Step 1 is to reach out to your loan servicer to understand your options.
You can avoid delinquency by doing things like changing your due date or even your entire payment plan. There is always some step, however small or temporary, that you can take to avoid finding yourself in this situation. Don’t give up hope.
“You may be eligible for deferment, forbearance or a lower payment,” said Katie Gampietro Burke, a certified financial planner and founder of financial planning firm Wealth by Empowerment. She pointed out that your worst option is to do nothing, as a lack of action can lead to serious consequences for your financial situation.
Sarah Li Cain contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.66%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
|1.99% – 5.64%4||Undergrad & Graduate|
|1.98% – 8.55%5||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 10/15/2020 student loan refinancing rates range from 1.98% APR to 8.55% Variable APR with AutoPay and 2.99% APR to 8.77% Fixed APR with AutoPay.