A deferment grants you a window of time where you do not have to make payments (think of it as a second grace period that can last up to 3 years). If your loan is subsidized then no interest will accrue during that time. If your loan is unsubsidized, then interest will accumulate each month and you may be called to pay it at certain times. For private loans, deferment eligibility is based on what type of loan you have.
Forbearance is another option for postponing payments, but it’s only available at the lender’s discretion and will accumulate interest. Contact your lender or visit their website to find out more about these two options.
What Happens if I Default/ My Account Becomes Delinquent?
This is the nasty side of student loans. We’ve all heard horror stories of debt ballooning to uncontrollable proportions, of people’s credit being ruined and of the federal government taking away part of your paycheck in order to pay back their loan. It basically begins when you miss your first payment and your account becomes delinquent – and it only gets worse once your loan is in default.
Being delinquent in terms of federal loans (as well as some private loans) means you’ve missed 1 to 8 payments and you’ve probably been getting notices asking you to pay. You are still eligible for deferment, forbearance, and other payment options, and you can still get back on track with minimal damage to your credit score.
When you’ve failed to make 9 payments (9 months, 270 days without making a single payment or negotiating another option!) then you’re in default and you really don’t want to be there. With some private loans, you enter default upon missing a single payment or by violating a number of other contractual agreements. Both delinquency and defaulting come up as big red flags in your credit report. Let’s put it this way – it sort of eliminates worries about being able to afford rent, because you won’t be approved to rent an apartment anyway!
When you default, your entire loan balance is due in full. If you have a private loan, the lender can sue you for the cost of the loan and charge collection fees (there is a limit on how many they can charge). You lose the option of deferring, consolidating, getting a new payment plan, applying for forbearance, and your credit report will carry that stain for six years.
If you have a federal student loan in default, the government has several legal means of getting payments from you involuntarily such as taking a certain amount of your take-home pay (this is called “garnishment”), seizing your tax refunds or social security benefits, denying you other loans and grants, and charging collection fees.
The only thing you can do is rehabilitate your loan. This usually means making regular monthly payments ON TIME for about 12 months or more. If you miss a payment or are late, then you are back to square one. There are different programs through your lender or the Department of Education to get your loan out of default. You need to contact your lender and see what your options are and commit to making the payments.
Is There Anything Good About Student Loans?
Having student loans isn’t all gloom and doom. For one thing, if you’re on time and consistent with you payments, it will actually improve your credit score. Mortgages, credit cards, car loans — these are all things you need a solid credit score to be able to obtain and the first step to having a good credit is showing that you can handle debt. Student loans are generally low interest and with all the repayment options available they’re the easiest debt to pay.
Another thing to consider is that all interest you pay is tax deductable. If you paid a lender more than $600 in interest during the year the lender will send you a Form 1098-E with the amount you paid. But even if you didn’t pay that much you can still deduct it, the lender just doesn’t need to send you a statement. Visit the IRS website for more info.
When it comes to student loans, knowledge is power in more ways than one. Loans are meant to further your education and career, not be a burden that weighs you down and kills your credit report!
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