Student loan delinquency and defaults: What are the differences?
Default, deferment, delinquency, oh my! What does it all mean?
According to Rohit Chopra, former CFPB Student Loan Ombudsman, there are over seven million Americans in student loan default. There is great concern that the combination of high debt to income levels and poor credit is creating future credit problems for young people.
Many who owe on student loans do not understand what the difference is between a default and delinquent student loan. To make matters worse many don’t know that there are affordable repayment plans for federal student loans that can possibly prevent non-payment or assist in re-establishing a payment plan. A basic knowledge of some key vocabulary may help students make better decisions in regard to their loans.
- Delinquency only applies to federal loans. It takes effect when the payment is one day or more past due and is reported to the credit bureau when 90 days late. A loan remains delinquent until the borrower makes up the missed payments through payment, deferment, or forbearance. If the borrower is unable to make payments, they should contact his or her loan servicer to discuss options to keep the loan in good standings.
- Default means failure to repay a loan according to the terms agreed to in the promissory note. For most federal student loans, you are in default if you have not made a payment in more than 270 days. For private loans you are defaulting after one day past due.
- Deferment is a postponement of payment allowed under certain conditions and during which interest does not accrue on Direct Subsidized Loans, Subsidized Federal Stafford Loans, and Federal Perkins Loans. All other federal loans will continue to accrue interest. Any unpaid interest that accrues during deferment period will be capitalized.
- Forbearance means that payments are temporarily suspended or reduced. A lender may grant a forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. Principal payments are postponed but interest continues to accrue. Unpaid interest during forbearance is also capitalized.
- Wage garnishment- The Federal Government or your guaranty agency can use Administrative Wage Garnishment to have your employer withhold earnings to collect unpaid non-tax debts that you owe to the Federal Government. If federal student loans are in default, up to 15 percent of your take home pay could be taken. Private student loans wage garnishment can only occur after bringing a lawsuit to collect against the borrower.
The best way to avoid problems is to have an affordable payment in the first place. To prevent loan default, look into an Income-Driven Repayment plan. This is the easiest way to make student loan payment affordable. To apply for these repayment plans go online and you can apply for free. Be aware of agencies that charge to do this service for you.
Don’t be afraid to communicate with the servicers of your student loans. Deferment and forbearance are options but you need to do this before you go into default. These possibilities are only short term so plan accordingly. A last option is to consolidate your loans into a new loan but understand this may cost you more in the long run plus you still need to be able to afford the monthly payment.
Michigan State University Extension offers a number of educational programs including programs on financial management and housing education. Visit the MI Money Health website where there are a number of educational materials and resources available for free.