It’s essential that adult borrowers have a financial plan so they know how they’re going to pay for their education, explains Stacy Tucker, vice president of financial aid operations at University of Phoenix. “Ideally, your plan should include non-loan options for paying your tuition,” Tucker says. “Adopt the mindset that borrowing is the last option for whatever can’t be paid through other means.”
What happens when you make a late payment or skip a payment
When it comes to student loans, always pay the full amount due and always pay on time. If you can’t, you have several options (we’ll get to those in a minute), but don’t ignore delinquency or default notices you get from your federal student loan servicer, which is the company that processes your loan repayments. (If you’re not sure who your loan servicer is, go to your dashboard at StudentAid.gov, and click on “View Details” under the “My Aid” section.)
Once you miss a student loan payment, your loan is considered “past due,” or delinquent. After 90 days of delinquency, your loan servicer will report the delinquency to the three national credit reporting bureaus: TransUnion, Experian and Equifax.
If you fall behind or skip repayments entirely, your loan goes into what’s called default. This incurs a number of serious repercussions, including:
- Collection fees. You could be charged up to 25% of principal and interest on your loan; and, in the meantime, interest will continue to accrue.
- Garnishment of your paycheck.
- Money may be withheld from your income tax refund.
- Damaged credit makes it harder to get other types of consumer credit
Delinquency and defaulting on a student loan could also impact your credit score. This is important because your credit score comes from the data in your credit report. It helps lenders quickly determine whether you’re a good candidate for a loan, based on how likely it is that you will repay one. While there are several different credit scores, the FICO® Score is the industry standard. It can range from 300 to 850 with anything below 580 signifying a risky borrower, and anything over 800 considered exceptional.
Credit bureaus look at a variety of factors when determining your credit score, with payment history being the most important at about 35% of your credit score. Making payments on time can help improve your score.
Once loan servicers report loans to the national credit bureaus that are more than 90 days delinquent or in default, that negative information may remain on your credit report for as long as seven years, hindering your ability to qualify for the most favorable terms and interest rates on any future loans you may pursue, such as:
- A home mortgage
- An auto loan
- A credit card
- Additional student loans
Additionally, a lower credit score may impact your ability to set up utilities if you move to a new home, qualify for homeowner insurance or even get a cellphone, because all of these activities may require a credit check beforehand.
Late or defaulted loan payments could cost you a job or promotion
Many employers today perform a background check prior to making a job offer, although some states have limited that practice. If an employer does conduct a background check, it usually includes your credit report, so a delinquency or default reported on your student loan could reflect negatively on you.