During the past three decades, growing rates of debt and default have taken on worrying, especially given their implications for young adults. The situation is made worse by the lack of clarity, as well as confusing rules and terms that surround loan repayment. There are times when reading through the requirements for loan repayment can feel like trying to interpret a foreign language. This is an unnecessary hurdle for borrowers trying to make their repayments. The goal of this article to make issues clearer by discussing the differences between defaulting and delinquency in student loan repayments.
Why and When Do Student Loans Default?
Every time a student signs the paperwork to borrow money for their college education, he or she inadvertently agrees to legal obligations to repay the loan under a prescribed set of terms. Default and delinquency are both terms used to describe some sort of failure to observe the terms of repayment. A borrower is deemed to be in default on most federal student loans if they fail to may remittances for a period of nine months. At that time, the whole loan balance becomes due. This is quite different from the delinquent loans meaning. A delinquency period starts on the first day after missing a payment. Once you become delinquent, there are specific responsibilities, including sending at least one written notice during the initial 15 days of delinquency. Unlike the issue, which sets in immediately you miss a payment, default sets in when you have not made any remittances for a set period, often for more than 270 days.
What Is the Impact of Delinquent Loans, and How Do You Get Out?
Delinquent on student loans consequences are multiple and ranging in severity. When a borrower is in delinquency, the loan service provider sends a notice, indicating the delayed payment. While being late with repayment once or twice may not instantly affect your financial status in a dramatic way, it could ultimately have an impact on your credit score. More immediate implications of being delinquent on student loans may include losing the benefits on your loans, such as discounts on your interest rate. However, when you fail to repay your loans for a prolonged period, you eventually enter default. Once in default, your credit ratings will drop dramatically, making you appear less creditworthy. As a result, your access to loans will be limited. The effect on your credit score can be a critical issue in the future as repairing the damage is not easy.
Your loan service provider can also take more severe actions like garnishing your wages. When you borrow the loan and sign the pertinent documents, you enter into a legally binding contract. In some cases, defaulting could permit the collection agency to withhold any possible tax refunds or garnish your wages until you repay the entire balance in full. Remember that, once you default, your entire balance becomes due in full. Getting out of delinquency to ensure that you do not reach default requires a fairly simple action. The borrower must resume or start making repayments as soon as possible.
What Does Defaulting on Student Loans Mean, and How Do You Deal with It?
Defaulting on a student loan occurs when the borrower fails to make repayments for a specific period, generally more than 270 days. Once the period elapses, you will be said to default on student loans meaning that the loan servicing agency is allowed to take measures to recover the balance in full. The status lowers your loan credit rating and affects your ability to receive credit in the future. In the event that you will be unable to make payments on time, the good idea is to contact your loan provider to discuss options for restructuring the terms of your loan. The good news is that loan service providers and lenders often permit a grace period before penalizing a borrower for missing a solitary payment. The table below presents synthesized information on default as well as grace periods for various loan types.
Table 1: Default and grace periods for different loans
Important Facts That You Definitely Need to Know
It is not surprising that defaulting on student loans come with serious consequences. The sure effect is damage to your credit and possible additional expenses. When you fail to observe the terms for repayment laid out when you received the loan you become in default on student loans meaning that legal and punitive measures can be taken against you. During the grace period, you are most likely to be in the clear. After that, your loan provider will report your failed remittances to credit bureaus, which, in turn, lower your credit scores. The ultimate implication is that, in the future, you will face a hard time accessing loan facilities. Your credit rating could even affect your job chances. Here are the main implications:
- Legal and credit problems
- Your tax refunds can be withheld to pay off the debt
- Your wages can be garnished
- You might receive lower Social Security payments
In the unfortunate event that you find yourself in default on your student loans, there are a few options to redeem yourself. The first is to repay the entire balance in full. This is not always possible. For large balances, consider seeking rehabilitation of your student loan. Alternatively, you could apply for consolidation, where you take out another loan, and use it to repay the original loan. The most important thing, no matter the type of challenge with your loan, is to communicate with your service provider.