Understanding Delinquency and Default

04/20/2016 05:55 pm ET Updated Dec 06, 2017

When used correctly, student loans can be your best friend. However, that can change if you don't make your payments. Delinquency and default happen when you neglect to make student loan payments and your finances take a turn for the worse (cue ominous music).

Delinquency: The Slippery Slope

Everyone knows that anything that sounds even vaguely like "delinquent" is best avoided. In the context of loan lingo, delinquency occurs when you fail to make a loan payment (yes, even just one payment) on time.

The longer the delinquency lasts, the greater its effect on your financial life. While federal student loan lenders (since 2010, the "lender" on all federal student loans has been the federal government) rarely assess late fees, they actually could tack on up to up to 6 percent for each delinquent dollar after 15 days of missing a payment, under federal rules. Private lenders are much more likely to actually charge late fees on private loans not backed by the government, so check your promissory note to be sure. And after about three months, your credit may start suffering as consumer reporting agencies begin getting notices about your past-due student loans.

To get your student loan back in good standing, you need to make all the payments you've missed. If you don't take any action, delinquency can lead to default.

Facing Default

Being past due on any federal student loan payments for 270 days (roughly nine months) can land you in the last place you want to be: default. Default can come sooner for some federal loans (like for health professionals) and for private loans, too.

Default means that you've broken the initial loan agreement, which comes with serious consequences. These can include collection costs, wage garnishment, and seizure of your tax refunds -- not to mention the damage a default can do to your credit score. If your loan does default, you can recover; however, your best bet is to avoid this situation altogether.

Avoiding Delinquency and Default

Paying back student loans can be tough, and it's not always easy to stay on top of payments. If you're struggling with your payments and worrying about your loans going into delinquency or default, take preventative action as soon as possible.

For federal student loans, you can find a more manageable payment plan, or sign up to postpone your monthly payments through either deferment or forbearance. While your loan is in deferment or forbearance, no payments are due. That can give you time to catch up. You may be able to back-date them so that they cover your missed payments and allow you to get your loan current without making a big lump payment. For private loans, you'll need to talk to your loan holder to find out if you have these options.

In either case, your first step should be to contact your loan holder. They can walk you through the various options that may be available to you. If you don't know who holds your federal student loans, you can find out by visiting the National Student Loan Data System (NSLDS). For your private loans, you'll need to pull your credit report to identify your loan holder. You can do this once every 12 months for free at AnnualCreditReport.com.

What's your financial relationship status? It doesn't have to be complicated! Use this infographic for tips on managing your personal finance.

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