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Keeping up with student loan payments is both an obligation and an integral piece of financial wellbeing for many Gen Z and Millennial professionals. In this guide, we examine the short- and long-term consequences of missing student loan payments, and strategies for avoiding delinquency and default.
Managing a large student loan debt burden – and the stress that comes with it – has become a hallmark experience for Gen Z and Millennial professionals. While approximately 45 million borrowers collectively owe over $1.5 trillion in student loan debt,[1] this financial obstacle is most acutely felt by individuals with lower incomes and/or facing financial hardships, which often leads to missed payments.
Fortunately for borrowers struggling to make monthly payments, options exist to help avoid the penalties of paying late or not at all. As federal student loan debt accounts for more than 93%[1] of all student loan debt, the federal government offers repayment options that can help make repayment more manageable. In this guide, we’ll explore options for both federal and private student loans, the various penalties that come with delinquency and default, and strategies for avoiding the repercussions that come with missing your student loan payments.
The penalties for missing student loan payments could be different based on what type of student loan(s) you have:
Federal student loans
Federal student loans provided by the government come with specific benefits and protections, and are categorized as:
Direct Subsidized Loans
Direct Unsubsidized Loan
Direct PLUS Loans and
Direct Consolidation Loans
Within these four categories are loan options for undergraduate students, graduate students, professional students, and even parents. Consequences for missed payments on federal loans may differ from those associated with private loans.
Private student loans
Private student loans offered by banks or other financial institutions typically lack the flexible repayment options and borrower protections of federal student loans. The penalties for missed payments on private loans may be more stringent.
Delinquency vs. default
When a student loan borrower fails to make payments on time, their lender will initially consider them delinquent. Over time, if payments are still not made, the lender will eventually consider the borrower in default.
Delinquency
Default
Delinquency occurs when a borrower has failed to pay on time and is now considered late. Payment is overdue but hasn’t yet reached a certain threshold.
Default occurs when loan payments are severely overdue, and the borrower has failed to make any payments for a predetermined amount of time. Different lenders will define the terms of default differently.
Missing student payments over time typically comes with a range of penalties and could have negative impact on a borrower’s financial future for years to come.
What happens if you don’t pay student loans
Immediate and long-term repercussions of missing student loan payments could include:
Late fees
Interest capitalization
Credit score impact
Collection costs
Legal actions
Wage garnishment
Loss of eligibility for future aid
Late fees
Late fees are imposed when payments are not received by the due date, adding to the overall cost of the loan.
Interest capitalization
Unpaid interest may capitalize, meaning it is added to the loan principal. This increases the total amount repaid over the life of the loan.
Credit score impact
Late payments can negatively impact your credit score, making it challenging to secure favorable terms for future credit needs, such as a mortgage or new credit card.
Collection costs
Collection costs may be added to the loan balance if the account is handed over to a collection agency.
Legal actions
Lenders may take legal action to recover the outstanding amount, resulting in legal fees and potential court judgments.
Wage garnishment
In cases of default, lenders may seek court approval to garnish wages, directly impacting your take home pay.
Loss of eligibility for future aid
Defaulting on federal student loans may lead to the loss of eligibility for future federal financial aid.
Federal student loan holders can expect this timeline of events if they miss payments over an extended period:
1
1 day
1 day
Loan enters delinquent status
2
30 days
30 days
You could be charged late fees, depending on your servicer
3
90 days
90 days
Your loan servicer reports the delinquency to credit bureaus
4
270 days
270 days
Loan moves to default status
How to avoid missing student loan payments
To stay on top of student loan payments and avoid negative financial impacts, consider these proactive steps:
Set automatic payments
Ensure timely payments and save yourself time by enrolling in AutoPay. Plus, if you’re a federal student loan borrower, you’ll get a .025% discount on your interest rate when you do so.
Create calendar reminders
Regularly check and mark payment due dates on your calendar. Even if you’ve set up AutoPay, marking the recurring transaction date on your calendar can help you stay cognizant of your budget throughout a given month.
Include costs in your monthly budget
Prioritize loan payments in your budget to avoid overspending. Start with our 50/30/20 Budget Calculator Tool, and be sure to include your monthly student loan payments as a recurring fixed expense in the “Needs” category.
Utilize deferment or forbearance
If you’re facing financial hardships, explore options like deferment or forbearance to temporarily halt payment. Learn more about these options here.
What to do if you’ve missed payments
If you’ve already missed payments, you should take action as soon as possible:
Contact your student loan servicer
Don’t stay silent – communicate with your loan servicer to discuss your situation and explore potential solutions.
Apply for Income-Driven Repayment (IDR)
Federal student loan borrowers struggling to make payments can explore eligibility for IDR, a federal program that adjusts your monthly student loan payment amounts based on your income and family size. Learn more about IDR eligibility by scheduling a 30-minute consultation with one of student loan specialists and visit these resources to learn more:
Consolidation can simplify payments by combining multiple loans into one, potentially extending the repayment period. Consolidating generally refers to federal student loans and can only be done through the Direct Loan Program or the Department of Education. Federal student loan consolidation can also offer additional benefits, such as access to IDR and federal forgiveness programs. Learn more about student loan consolidation in these resources:
Refinancing student loan debt could be a useful strategy for borrowers struggling to make their monthly student loan payments. Refinancing involves applying for a new loan through a private lender. If approved, the lender will pay off your original student loan(s) and give you a new loan with preferable terms. While both federal and private student loans are eligible for refinancing, note that if you refinance federal student loans with a private lender you will lose access to federal programs, such as IDR, federal forbearance, and any other benefits offered to federal borrowers. Learn more about student loan refinancing here:
Keeping up with student loan payments is not just a short-term financial obligation, it’s an integral piece of financial wellbeing for many young professionals. Missing payments could lead to a cascade of consequences potentially impacting your creditworthiness, where you can afford to live, and even your career trajectory.
If making scheduled payments is a struggle, know that resources and options are available to you. Be proactive by mapping out your monthly budget and get clear on how your student loan payments fit in. Remember that proactive financial management is key to achieving your educational and career goals. Schedule a consultation here for one-on-one guidance from a student loan expert who can help you understand all your options and work with you to create a plan to help you avoid the consequences of missing student loan payments.
Quiz
How much do you know about penalties for missing student loan payments?
A student loan borrower is considered in default when
their loan payment is overdue, but they haven’t yet reached a certain timeline threshold.
their loan payments are severely overdue, and the borrower has failed to make any payments for a predetermined amount of time.
True or false?
Federal student loan borrowers having difficulty with their student loan payments could be eligible for Income-Driven Repayment (IDR), a federal program that adjusts borrowers’ monthly payment amounts based on their income and who their employer is.
True
False
The IDR program adjusts your monthly payment amount based on your income and family size.
True or false?
Only federal student loans are eligible for Income-Driven Repayment (IDR).
True
False
Private student loans are not eligible for the federal IDR program.
Choose the correct answer.
If you miss student loan payments for an extended period of time, penalties may include:
Late fees
Interest capitalization
Wage garnishment
Legal action
All of the above
Result
Now that you understand the penalties for missing student loan payments, schedule a free 30-minute call with one of our student loan specialists to understand all your student loan options.
