What happens if I miss a payment or default on my student loan?
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UPDATED: Feb 1, 2012
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If borrowers miss payment or default on their student loans, they need to be aware that the lenders will seek their money in any way they can. No, there is no jail-time associated with partial payments, missed payments, or even ceasing to make payments all together—so stop worrying about that. But do be aware that if a borrower uncooperative, lenders can obtain access to bank accounts, tax refunds, and federal benefits.
Depending on the type of student loan a borrower is having trouble repaying, partial payments may prove to be a viable option. Lenders prefer receiving some money as opposed to no money at all, and thus will be more prone to work with a borrower who is willing to arrange partial payments versus defaulting all together. However, in order to make such an arrangement, it’s important that the borrower contact the lender and arrange a payment plan on an individual basis.
If a borrower doesn’t contact their lender and simply starts making partial payment on their own, lenders will consider such a move in breach of contract and pursue their money. It’s important to keep a healthy relay of communication between borrower and lender in order to come to a mutual understanding.
For those with government student loans—Stafford, PLUS, Direct Loans, or Federal Family Education Loans (FFEL)—the income-based repayment (IBR) plan may be accessible. The IBR plan takes a look at individual borrowers’ income and outstanding debts, and works with the borrower to develop a reduced payment program. This government-backed program is designed to help those borrowers who can only afford partial payments.
If a borrower begins missing payments, they can expect to begin seeing some damage to their credit score. Missed payments will be reported to the credit rating bureaus, and they’ll change a borrower’s credit score to reflect that activity. Additionally, late payment fees will be administered, requiring a borrower to shell out more money than if they had paid their bills on time.
In the event a missed payment isn’t remedied, or if the activity becomes habitual, a lender may consider labeling the student loan as being in default. If a borrower can’t meet their financial obligations due to temporary reasons, they may want to consider deferring or forbearing their student loans.
When one defers their student loans, it puts off payments for a specified amount of time due to financial hardship, relieving the borrower of their financial obligations for a short period while they try to find their financial feet once more. Deferment can be achieved only by those who are not in default. That means the borrower needs to be current on their payments, in a grace period, or already in a deferment or forbearance program.
Forbearance is similar to deferment in that it allows a borrower to cease making payments for a short period of time—except interest continues to accrue while student loans are in forbearance. Since interest continues to accrue, lenders are typically more prone to grant forbearance than they are deferments.
Both of these plans can be inquired about further and applied for through a borrower’s lender.
The word borrower’s fear, default occurs when one misses too many payments. If a borrower is in default, lenders can usually assume their borrower is not trying to—or simply cannot—make anymore payments.
As a result, they will often pursue their outstanding balance through other means.
Wage garnishment, intercepting tax refunds, and taking a portion of an individual’s federal benefits are all legal methods available to lenders to retrieve their money. When a lender begins taking their cut of money from a borrower’s source of money, the borrower will need to appeal to their lender on an individual, case-by-case basis in order to get them to stop. And usually lenders will not agree to take their hands out of one’s financial cookie jars so-to-speak until a borrower can prove he or she is willing and able to make payments on their own.