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Takeaways from the Key Takeaways
- Student loan experts advise delinquent students to take action immediately to avoid defaulting. They could also have their wages garnished.
- Borrowers have the option to choose a payment plan that is lower, such as a repayment plan based on income.
- Borrowers who set up automatic payments will receive a reduced interest rate and won’t miss a payment.
- If borrowers can’t afford to pay their monthly payments even under an IDR, they may temporarily pause them through deferment and forbearance.
The Department of Education has announced that it will begin collecting student loans on May 5. However there are still ways for borrowers to avoid defaulting.
According to the Department of Education (DOE), there are approximately 4 million borrowers in late-stage delinquency. That means they haven’t made a single payment for between 91 and 180 days.
After 270 days, federal student loans are considered to be in default. Experts advise borrowers to avoid defaulting as they may have their wages garnished, and there are few resolution options.
"A lot of the things like income-driven repayment options are not immediately available when you're in default,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance. "The number one advice, I would say, is, act early. Don't wait until you're on the cusp of 90 days delinquent and you're going to get reported to the credit bureaus tomorrow. Take some initiative, and reach out as soon as you realize you're in financial distress."
Move Into A Lower Payment Option
Borrowers avoiding monthly repayments because their current repayment plan was too high have the option of moving to a more affordable plan.
Federal Student Aid (FSA), which had previously closed applications for income-driven payment (IDR) plans because of a court ruling that questioned certain IDR plans, reopened them less than a week ago.
This week the department announced that the loan servicers will start processing IDR applications the following week and that the application process to the more affordable plan will soon be streamlined.
The FSA Loan Simulator allows borrowers to find the best repayment plan by using the FSA Loan Simulator. Once the borrower applies, they will be placed under administrative forbearance while their application is processed.
Set up automatic payments
Signing up for automatic payments through their federal student loan servicer is another option for borrowers who want to avoid missing payment.
This option allows monthly payments to be taken directly from a borrower's bank account and could reduce your interest rate by 0.25% on direct loans.
"It's paid monthly right out of your checking account, so you don't have to worry about going delinquent or going into default," said Jack Wallace, a loan expert and director of government and lender relations at Yrefy, a private student loan company.
Use Deferral and Forbearance
If borrowers can’t afford to pay their monthly payments, even if they have a more affordable repayment schedule, they can request forbearance or a deferment. This will temporarily pause the payments.
Forbearance or deferment is available in cases of economic hardship, or when a borrower finds it difficult to pay on a monthly basis. These options allow borrowers to temporarily suspend their payments. However, they can only do so for a limited time.
Interest will continue to accrue on some loans even if they are in deferment or abstention. Interest accrual is what makes the difference between these types of payment pauses.
"These are just temporary fixes: they can use a deferment or forbearance to temporarily postpone the payments and possibly bring [the loans] current," said Betsy Mayotte, president of The Institute of Student Loan Advisors.
