January 4, 2021 – By Reyna Gobel
Federal and private student loans have more options for skipping payments when you experience a financial hardship than most other types of loans. However, you can still face penalties, such as a damaged credit score, if you don’t let your servicer know you’re struggling to afford your bill before a missed student loan payment occurs.
Here’s what happens when you miss or make a late student loan payment, as well as how to avoid penalties.
What Happens if Your Federal Student Loan Payment Is Late
1 to 89 days
If you are late by a day or two, nothing will happen. Catch up on payments, get an approved break from payments or choose a new repayment plan before your servicer reports your late payment to the credit bureaus.
Technically, the government could charge late fees, but it hasn’t since the direct loan program started. Also, each payment on an income-driven repayment plan counts toward student loan forgiveness, even if the payment is $0. This is why it’s always good to discuss financial issues with your servicers to review your options.
At 90 days, your servicer likely will report your late payment to the credit bureaus, and your credit score will drop. Late payment reporting continues on a monthly basis once you’ve missed payments for 90 days.
At this point, you’ll enter student loan default for non-payment. Your entire unpaid loan balance becomes due—this is called acceleration—and you’ll lose federal loan benefits like deferment, forbearance and the ability to apply for an income-driven repayment plan. You’ll also become ineligible for federal aid, and your servicer can require wage garnishment in order to repay your loans.
Your loan also could be referred to a collection agency, and a fee of 17.92% of your balance could be added to your loan if it’s held by the U.S. Department of Education. If your balance was $60,000, adding 17.92% to the cost of your loan makes the total balance due over $70,700 to make up for collection fees.
Your interest rate doesn’t change. You can dispute the default if it was in error, such as if your school was supposed to report your status being in school to your federal student loan servicers. If the default is correct, you may be able to rehabilitate your loan.
What Happens if Your Private Student Loan Payment Is Late
Private student loans have their own rules when it comes to credit reporting, late fees and late payment consequences. The rules can differ from lender to lender.
Here’s what you need to know about when private student loan lenders will charge late fees, report late payments to credit bureaus and take legal action for nonpayment.
You will be considered delinquent when you are late on a private student loan payment by just one day, says Madison Block, a spokeswoman with American Consumer Credit Counseling. Late fees likely won’t be charged. Lenders may tell you that you have a grace period of a few days before a payment is considered late.
30 to 45 days
At this stage, you could start accruing late fees, Block says. The total charge and when those fees are assessed will vary based on the lender.
After 90 days, your lender will report your late payments to the credit bureaus and your credit score “can take a massive hit,” Block says. This is especially true the higher your credit score or the shorter your credit history, the former because one missed payment is a big red flag if you otherwise have solid credit, the latter because the bureaus have less information about you to understand your pattern of payment behavior.
Unlike with federal loans, which go into default after nine missed payments, your private loans could be considered in default after just three missed payments, according to the Consumer Financial Protection Bureau. When default occurs, however, is completely dependent on the lender.
The lender may sue the borrower to collect the funds or send the debt to a collection agency. If the private student lender wins a court case, you could end up with your wages garnished at your job.
How To Avoid Missing Student Loan Payments
There are several reasons why you might miss a student loan payment—some of which have nothing to do with not being able to afford repayment. Here are three scenarios and what you should do in each.
1. You Forgot the Loan Existed
What you should do: Find all your student loans—both federal and private. Your federal student loans are listed on studentaid.gov and all your private student loans on your credit reports via AnnualCreditReport.com. If you see a loan you don’t recognize, contact either the Department of Education or the lender directly.
2. You Lose Track of Payment Dates
What you should do: Choose automatic payment deductions. If you forget to make payments, the best way to avoid missing payments in the future is to sign up for automatic withdrawals from your bank account. Federal student loans offer an incentive of a 0.25% interest rate reduction for signing up.
Private student loan lenders may offer an incentive as well. If you change bank accounts, make sure you give yourself a month’s overlap to make sure your student loan automatic debit is processed on the new account before closing the old one.
The other option is to call your servicer or lender and ask to change the payment date to one that is easier for you to remember.
3.You Can’t Afford Your Payments
If you can’t afford to make your payments, here are three steps you can take:
- Call your loan servicers immediately. Federal and private student loans offer deferment and forbearance options during time periods of economic hardship. Federal loan servicers have mandated ones, but often private student loans will offer payment breaks at their discretion. Ask your loan servicers and lenders about taking a break from payments or switching to an alternate payment plan.
- Put federal student loans on hold, or lower payments, to pay private ones. Since federal student loans have more options for breaks from payments, it can be best to use these payment breaks while you catch up on private student loan payments.
- Reevaluate your budget. If you have a financial issue with student loan repayment and it isn’t a temporary issue, you should take a close look at your budget. Look for painless budget cuts first. For instance, negotiate your phone, cable or insurance bills.
Missing or being late on a student loan payment generally doesn’t have consequences for at least 30 days. However, you should look for solutions to missing payments as early as possible. The solution that’s best for you depends on why you are missing payments and ranges from tightening up budgets to choosing a new repayment plan.
Whatever you do, don’t skip contacting your lender if you can’t make a payment. Consequences can be serious, such as a credit score drop or your wages getting garnished.