A recent study of student borrowers delivered sobering news: Roughly two in every five indebted graduates has difficulty paying their loans, falling into either delinquency or default. The impact of delinquency is bad, but default is tragic, experts say.
“It’s a catastrophic event for a student,” says Gary Braham, chancellor of Brandman University in Irvine. “It seriously impacts the student’s credit rating, causes them to pay increased fees on the loan and can make it impossible for them to go back to school. These become really tragic individual stories.”
The stories are possibly more tragic because repayment woes are relatively easy to avoid in today’s student loan marketplace, where repayment options have been expanded to give borrowers increasing flexibility with federal loans. Some experts believe that students would never fall into default if they knew the consequences and their other options.
What are they?
First, it’s helpful to walk through the time line.
Students are given six months “grace” after graduation. During that grace period, they do not need to pay on their student loans. But sometime during that period, they’ll receive notices from their lenders, spelling out the total amount of their debt and when the first payment is due. If students don’t request otherwise, monthly payments are based on the standard repayment formula, which would have the debt repaid within 10 years.
If the student does nothing, the first payment is expected in the seventh month prior to graduation. If that payment is not made, the student becomes “delinquent.”
But it’s not until the first payment is 60 days late that bad things start to happen. That’s when lenders typically report the late payment to the three major credit bureaus, who add the notation to your credit report.
The information in your credit report is used to create a “credit score,” which is used by other lenders and many insurance companies to determine what to charge for both loans and insurance. In addition, many employers check credit reports to see if you’re financially responsible. In some instances, a bad credit report can prevent you from getting a job.
Every month that your debt goes unpaid, the delinquency becomes more severe as far as your credit score goes. After nine months of delinquency, your loan goes into default.
When the loan goes into default, it is transferred to the “guarantor,” which will contact the borrower anew and ask if there are extenuating circumstances that led to the default. Was the loan balance improperly calculated or did the lender fail to communicate what the borrower owed? If not – or if the graduate doesn’t respond at all – the loan is “accelerated.”
That means that the full amount, principal and interest, is due and payable within 120 days.
Not bad enough? If the loan is not repaid in full during that time, the lender has the right to assess a collection fee amounting to 18% of the principal amount (which now also includes all the interest charges that have accrued while you were in delinquency).
“It’s an enormous increase in the amount you owe,” says Kim Carter, manager of repayment assistance at American Student Assistance in Boston.
In addition, the lender has the right to seize both a portion of your wages and any tax refund you might be due.
When graduates let debt fester to this point, it can literally take years and cost them thousands of dollars to get back on the right track.
But there’s almost no explanation for why a graduate would be forced into default, says Maria Wasserman, managing director of operations at All Student Loan in Los Angeles.
Student borrowers are able to “defer” loans when they are unemployed or under-employed for up to two years. If you go back to school, you can postpone repayment almost indefinitely. If you run out of deferment, you can ask for “forebearance,” she adds. Where deferment is mandated in some circumstances, whether a lender agrees to a forbearance is discretionary.
If you can’t get a forbearance, but can’t afford to pay, your best option may be to sign up for the federal government’s “income-based repayment” plan. This plan calculates your monthly payment as a percentage of your discretionary income. If you earn little or have a large family, the required payment can be reduced to nothing at all. When in this program, even if you’re not paying because your income is too low, you are not considered to be in default or delinquency.
The most important thing, says Carter, is to get educated about your debt and options when you’re in that six month grace period following graduation.
“You have a lot of options,” adds Wasserman. “Waiting to find out what they are until you go into delinquency or default is too late.”
Kathy M. Kristof 