Why You Never (Ever) Want To Fall Behind On Federal Student Loan Payments

April 08, 2019

Few of us are ever on time for everything all the time. While it might be inconsiderate to be late for a meeting or pretentious to arrive fashionably late to a party, being late with bill payments can be expensive. If the late bill is a federal student loan payment, it can be even more than expensive; it can be frightening, physically disruptive, and even embarrassing.

What can happen when you’re late with your student loan payment

Imagine getting mysteriously called into your employer’s human resources office one day. Fearing the worst, you are relieved when the HR exec tells you they aren’t firing you. They do, however, want to discuss with you an ominous letter they received from the federal Department of Education notifying them of wage garnishment procedures against you. Yikes!

I spoke with someone recently who called our financial coaching line distraught about his spouse’s federal student loans. Not only was she behind on payments, but she had reached the point that her wages were being garnished and their expected federal tax refund was replaced by a letter stating the refund had been recaptured to help repay the outstanding student loan balance.

How did they get into such a pickle? Let’s take a closer look.

When you miss a student loan payment or two

When your payments are late by 30-90 days, here are some of the unpleasant things that can happen:

Late fees begin to stack up.
Your student loan processor begins to call you.
Your loan status changes to “delinquent.”
Your credit score begins to drop.
Interest rates on your credit cards may begin to rise.

You might be surprised to know…

The folks who process loan payments on behalf of the Department of Education (or ED, as it’s known, not DoE) are actually pretty friendly if you miss a payment or two. I know this from personal experience. Way back when, after I graduated with my bachelor’s degree, I knew my student loan payments were soon to commence, but I had somehow missed a communication or two and let the first couple of payments get by me.

I received a pleasant phone call asking if I was aware of this situation. We had a quick chat to verify some details; I made a payment that day and then set up automatic bill pay with my bank so THAT wouldn’t happen again.

Lesson learned: keep the lines of communication with your student loan processor open from the start. Add them to your smartphone contacts. Although delinquency is serious, it is usually easily fixed by catching up on your payments and keeping them caught up.

What if payments are more than you can afford right now?

Don’t stick your head in the sand and ignore – that’s the worst thing you can do. Student loan lenders will work with you – to an extent – but only if you communicate with them early on and stay in touch.

Several repayment options are available, and you may be able to switch to a less expensive monthly payment arrangement. This move will, however, result in additional interest payments and a longer payback period, making the cost of your education that much more expensive. However, this added bit of expense is better than the alternative. Restructure your budget; have a yard sale; take on a side gig… do whatever it takes. But keep making payments to avoid the next level, which is kind of a point of no return.

What if you miss several student loan payments?

Now things begin to get seriously serious. As in serious times two. And expensive. Seriously expensive. And possibly semi-permanent. If your student loan payments are late by more than 270 days (that’s about 9 months), your loan status changes from “delinquent” to “default.” This is very, very bad. Here is the additional unpleasantness that awaits:

Your federal student loan balance(s) are now due in full, along with any accrued penalties, interest, fines, and collection agency charges. (I told you it was bad).
The federal government can (and often will) garnish up to 15% of your wages to repay the amount owed.
The IRS will keep your federal tax refund as well and apply it to your loan.
Your credit score is now very, very ugly. Getting new credit is going to be a challenge. And expensive. Maybe impossible.
Your student loan service may take you to court. This can also be very expensive.

Defaulting on a student loan is ugly business. You really don’t want to do this. You might blow off the cable or electric bill or even your landlord for a month or so, but don’t mess with student loan lenders. They can and will take some very serious steps to collect what is owed. After all, they have the power, might, and resources of the United States government behind them, and they are not afraid to use it.

Default can be undone, however

Defaulting on a federal student loan is extremely unpleasant, but it doesn’t have to be permanent. According to Federal Student Aid (an office of the U.S. Department of Education), there are two ways you can get out of default, other than immediately repaying the entire loan amount in full:

Loan Rehabilitation: This is when you enter into an agreement with the lender to make a certain number of payments within their timeline, and if you do so, then your loan will no longer be in default. (you’ll have to continue the payments though to keep it that way)
Loan Consolidation: If you qualify, this is when you roll the defaulted loan in with one or more other federal loans and continue repaying them under an income-driven repayment plan. You must first make several payments on the defaulted loan to demonstrate that you’re serious, but then you may be able to combine it with another loan to get it out of default.

Loan rehabilitation takes a bit longer, but it can also be more flexible than loan consolidation. The Federal Student Aid website provides more information and detailed instructions on how to do both of these.