5 Approaches for Dealing with Student Loan Delinquency
The Federal Reserve Bank of New York published a quarterly report last month on household debt and it showed that student loan delinquencies were still rising. As of Q4 of 2016, 11.2% of all student loans were 90 days or more past due on repayment and some borrowers were actually in default. As Florida debt collection attorneys, we are on the front lines of this losing battle between adult former students, and their debt load. Having to pay student loans is often given as one of the main reasons for being able to take care of often more critical debts.
This is a disturbing trend, particularly when compared to consumer debt in general which is at 4.8% and includes credit card, auto loans, mortgages etc. In other words, student loan borrowers even with deferment, lower payment options, and other federal student loan options are more than twice as likely to be seriously delinquent with repaying their student loan.
Many studies indicate that student loan borrowers are confused by the options available to them if they are struggling to repay their student loan. They are either not aware of the existing options or they are confused or overwhelmed by the ones that they are aware of.
Below are 5 basic approaches for handling delinquent student loans.
- Understand your loan standings:
Step one is to organize yourself and put first things first. What kind of loan do you have? How much do you owe? Who holds your loan? If you are in delinquency on those loans, how delinquent are you?
The National Student Loan Data System displays your federal student loans along with their status. Private loans, such as institutional and state loans, will be outlined only on your credit report.
- Know the timing of repayment:
When you know where your loans are, contact the loan holders to find out the status of your delinquency and what options are available to you. Timing is very important.
It will make a big difference what options are available to you for debt relief if you are not yet in default and this applies for private and federal loans. The options reduce dramatically if you are in default, especially for Federal loans, and there are severe consequences.
Contact your loan holders right away if you think you might be close to default. Just missing that deadline by one day will make getting the loan back into good standing much more challenging and time-consuming.
Timing might impact your credit rating. The majority of Federal student loan holders file a report if you are 90 days or more past due. Contacting them on day 89 can be the difference between having no impact to wrecking your credit for years to come even if you bring the loan back to good standing.
- Review default options:
Even if your loan is in default, the good news is that you have options. We’ve previously looked at loan rehabilitation and consolidation to deal with defaulted federal student loans. Loan rehabilitation especially has been in the headlines recently as a result of changes in the Department of Education guidance regarding when the cost of collection is included with defaulted loans.
Basically, this change will not impact student loan borrowers who are in default as the Department of Education along with guarantors of student loans have stated publicly they will keep the status quo of not adding collection costs to default borrowers who start a loan rehab program inside of 60 days of default and finish the program in the 10 months as required.
The 60 days is usually a hard deadline, therefore timing is critical if you think you might be in default.
- Evaluate your repayment alternatives:
Under the federal student loan programs, you have a number of choices if your loan isn’t in default yet.Forbearance is the quickest way to deal with delinquency because you can usually get your application processed via telephone; however, it is usually the most costly option.
All deferments, besides the in-school deferment in certain instances, need an application. These forms are available for download from the website of the loan holder. Just fill them out, scan them and send them in using the holder’s internet portal.
Your best option is to talk to your loan holder about lower payment options. There are a number of repayment options under the federal loan program such as extended repayment plans, base payments on your earnings, and reduce payments and then slowly increase them. This federal repayment calculator will show the effect of each plan on your monthly payment and in particular the total repayment amount.
State, institutional and private loans usually don’t have the repayment options available like the federal ones do. Limited forbearance is offered by most, but usually at a cost.
Some are not offering temporary payments on interest-only or bigger reductions in interest rates during hardship times. Consolidating your private loans is usually the best way to reduce your monthly payments in the long run.
- Make repaying private loans a priority:
As a general approach, we usually suggest to borrowers who are struggling financially with both federal and private student loans to reduce the federal loan payments to a minimum and focus on repaying the private loan quicker.
There are additional safety nets in place for federal loans that are not available with private loans. If you experience a financial disaster, there are more flexible options with federal loans compared to private loans.
The Student Loan Ranger is still concerned about the number of student loan borrowers who are struggling with repaying their loans. Although it might be overwhelming, having a clear plan will help to minimize that burden and help you to understand the available choices. Your first and smartest step you can make is to call your lender and make a repayment plan.