Student loans generally fall into two categories: federal student loans and non-federal student loans. Federal loans come from the United States national government and are controlled by the Department of Education, while non-federal loans may come from a variety of sources to include state or local governments, the school itself, or a private organization of some sort.
Federal loans for students:
Federal loans fall under one of several categories. Two of the most common are the William D. Ford Federal “Direct Loan” Program, or the Federal Family Education Loan “FFEL” Program. Loan repayment in these programs is made to a “loan servicer” and according to a repayment schedule. StudentAid.ed.gov lists seven different schedules, including a standard 10-year repayment plan, a graduated plan with lower initial payments, an extended plan for repayment over 25 years, and four different income-based repayment schedules that match the repayment rate to one’s annual earnings.
If you’re having trouble repaying your loan there are several options afforded to you:
Consolidation: Consolidation simply means combining multiple loans into one. This is a good way to simplify repayment. The Department of Education does not charge an application fee for consolidation so if you are being told otherwise, you are not dealing with the DoE. Consolidation can be a good way to lower payments if necessary by extending the loan to a 30-year timeframe. Although extending repayment periods will help lower monthly payments, keep in mind that it will likely increase the total amount you pay back.
Deferment and Forbearance: There are certain circumstances that will allow you to defer (delay) repayment of your loan to avoid a default. A deferment is a period of time where you do not need to make repayment of the loan principal or interest. For deferment eligibility read here. If possible, take advantage of deferment and forbearance opportunities before your account goes into default; at that point you would no longer be eligible.
Forgiveness, Cancellation, and Discharge: On occasion, there are certain uncommon circumstances where you may no longer have to pay back a student loan. These include the closure of your school while you are in attendance, if you have a total and permanent disability, or if you, the borrower, were to die. Other circumstances can be found on the Department of Education website.
Delinquency: Before default your loan will be categorized as delinquent. Delinquency happens the day after you miss your first payment and continues until payments are made current. Do not ignore the notices from your loan servicer as they will report all delinquencies past 90 days to the three major credit bureaus (Equifax, Experian, and TransUnion). A negative credit report can impair your ability to get a loan to buy a car or home, to sign up for utilities, a phone plan, or to rent a home.
Default: There are serious repercussions if you fail to make payments toward your student loan (i.e. default). The point at which your loan is considered in default depends on the frequency with which your loan payments are due. If payment is due monthly then default occurs after 270 days of non-payment. If payment is due less than once monthly (specifically in the case of FFEL program), then default occurs after 330 days.
So what do you do if you’re delinquent?
Contact your loan servicer (this would be the school in the case of Perkins loans) or the agency that handles billing for your loan. Explain your situation fully. Ask the agency what options you have to make payment and whether or not they will work with you.
What happens when your loan goes into default?
The entire unpaid balance of your loan is immediately due when your account is placed in default. You will no longer be eligible for federal student aid or deferment opportunities, your credit will be negatively affected, and your account may be placed with a collections agency. The government may also withhold your income through a tax offset (where the IRS holds onto your annual tax refund and puts it towards your loan payments), or work with your employer to withhold wages from your pay (wage garnishment).
Education is incredibly important, but student debt can add up over time. Use the tips above to keep your account in good standing. If you want to learn more about the education collections process as it relates to student debt, click here.