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Federal Student Loan Delinquency, Default Consequences: A Timeline

Millions of students each year invest in their future by taking out federal loans to go to college. For many,…

Millions of students each year invest in their future by taking out federal loans to go to college. For many, these loans will prove to be a worthwhile investment. However, far too many borrowers struggled to repay even before the COVID-19 pandemic hit, with more than a million borrowers entering. fault in 2019 alone.

Due to the pandemic, the federal government has provided key financial assistance to most federal student loan borrowers by suspending interest and payments and stopping the collection of delinquent loans. While the US Department of Education has announced its intention to resume loan repayments in February 2022, it looks like the federal government may provide additional relief to borrowers who were in default before the pandemic.

In the meantime, here’s a timeline of what happens when a borrower defaults and then fails to pay off a direct federal student loan – and how to protect yourself from the resulting financial damage.

Payment up to 90 days late

One day after missing a payment, the loan is considered past due, or offender. It will remain overdue until you pay off the overdue amount or take action to change your payment obligations. You may be charged late fees in excess of the interest that continues to accrue on the principal due.

If you are unable to make your full monthly payment, contact your student loan attendant immediately and ask for help. If you need to reduce your monthly payment amount, you may be eligible for a more affordable income-based repayment plan. You can also consider suspending or suspending your loan.

[Read: Student Loan Interest Capitalization — What to Know]

90 to 269 days late

If your student loan is 90 days past due and you haven’t made arrangements, the default will be reported to the three major national credit bureaus. This can lower your credit score, which can affect your future financial life, including your ability to take out a loan. residence mortgage or a car loan, rent an apartment or get a credit card.

Updates on your overdue loan are reported to consumer agencies every 30 days. You will receive ongoing communication from your loan manager regarding the overdue loan, and you may also be charged additional late fees over time.

Once the loan is 240 days past due, your service agent will send you a final demand letter requesting payment of the entire loan balance within 30 days.

270 days or more late

Federal direct loans default after 270 days. Once this happens, you will face a number of new consequences.

Your entire outstanding loan balance, including unpaid interest, becomes due immediately, and you can no longer access protections such as income-tested, deferral, or forbearance.

You can also have your seized wages and have tax refunds and federal benefit payments withheld and applied to the overdue loan balance. In addition, you may be sued and be charged related costs, including court costs, collection costs, and attorney fees. Some states may also deny, suspend, or revoke certain professional licenses as a penalty for defaulting on a student loan.

[Read What to Do When Your Tax Refund Is Seized for Student Loan Default.]

You also lose eligibility for additional federal student aid, including Pell Grants. This is especially devastating for those who are in debt from a program they did not complete and who now have fewer options to re-enroll, graduate, and increase their income. Colleges typically withhold a borrower’s transcript if they owe the school money, making it difficult to transfer earned credits to another school.

Defaulting on student loans has serious and lasting consequences. Many see these consequences as too punitive and self-defeating, and consumer advocates are striving to reform the system. However, it is essential that borrowers understand the potential devastation that can result from defaulting on a federal student loan and seek help before the default occurs.

How to avoid the fault

The federal student loan system can be difficult to manage, and many borrowers struggle to make their monthly payments not because they don’t want to make payments, but because they just can’t afford it. to allow.

If this is your problem, contact your student loan officer and make a plan. There are many options including income-based reimbursement plans that tie a borrower’s monthly payment amount to their income and family size and often reduce the amount of monthly payments.

[Read: How to Manage Old, Unpaid Student Loans]

You can also get short-term relief with a abstention or adjournment, which suspends loan payments for a period of time. While it is best not to use these options for a long period of time as interest can continue to accrue, they are essential safety nets to keep in mind if you are having financial difficulties. To find out if you qualify for any of these options, contact your student loan officer.

What to do if you are in default

If you were at fault before the pandemic, stay up to date with the latest news from the education department. You can also explore ways to get out of default, including through the loan. consolidation or rehabilitation.

For example, if you were rehabilitate a student loan in arrears when the relief period begins, each month of suspended payments counts towards rehabilitation.

It is also important to know your consumer rights. Debt collection for student loans is regulated by federal law, which makes it illegal for a lender or other debt collector to mislead or harass you. They cannot engage in illegal practices and are required to validate that you owe the debt they are trying to collect.

If you believe your rights are being violated by a debt collector, report it to a government agency such as your state’s attorney general’s office, the Federal Trade Commission, or the Consumer Financial Protection Bureau.

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