Student Loan Consequences: What Borrowers Need to Know
After a year-long reprieve, federal student loan borrowers who fall behind on their payments will once again face financial repercussions. With the grace period now over, it’s essential for borrowers to understand the consequences of missed payments and the options available to them.
Understanding the Timeline
Before borrowers face delinquency or default, they will receive multiple notices from their student loan servicers. Typically, a payment must be around 90 days late before it’s reported to credit rating companies. It takes between 270 days and 360 days for borrowers to face the consequences of default, including possible wage and Social Security benefit garnishment, up to 15%.
Avoiding Default
Defaulted federal student loan borrowers can also lose eligibility for mortgages from the Federal Housing Administration or the U.S. Department of Veterans Affairs. To avoid these consequences, struggling borrowers can explore options such as deferment or forbearance.
Deferment Options
Borrowers who are unemployed can request an unemployment deferment with their servicer. Those facing financial challenges may be eligible for an economic hardship deferment, which includes people receiving certain types of federal or state aid. Other deferment options include the graduate fellowship deferment, military service and post-active duty deferment, and cancer treatment deferment.
Forbearance: A Temporary Solution
Borrowers who don’t qualify for a deferment may request a forbearance, which allows them to put their loans on hold for up to three years. However, interest accrues during the forbearance period, leading to a larger bill when it ends.
Income-Driven Repayment Plans
Income-driven repayment plans can be a great option for borrowers worried about affording their bills long-term. These plans cap monthly payments at a percentage of discretionary income and forgive remaining debt after a certain number of years. Some borrowers may even qualify for a $0 bill.
Acting Sooner Rather Than Later
It’s essential for borrowers to explore these options early on. Once a borrower is in default, they must take specific steps before benefiting from an affordable repayment plan, deferment, or forbearance. This process, called loan rehabilitation, can take several months to complete.
By understanding the consequences of missed payments and exploring available options, borrowers can avoid financial repercussions and get back on track with their student loan payments.
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