Since the onset of the payment pause in 2020, student loan borrowers have not faced consequences for missing payments or defaulting on their federal student loans. For three and a half years, payments were suspended. When borrowers resumed repayment in October 2023, they were protected by the U.S. Department of Education’s (ED’s) On Ramp to Repayment initiative, which prevented late payments and defaults from being reported to credit agencies through September 2024.
Presently, late federal student loan payments are again being reported to credit agencies. With late payments once again being reported to credit agencies, it's important to know the timeline and consequences of default.
DAY 1: Borrowers are considered late or delinquent the day after they miss a monthly student loan payment.
DAY 90: If a borrower is at least 90 days delinquent, their loan servicer will report the delinquency to the national credit bureaus (Source: StudentAid.gov). The reporting of their delinquency will continue monthly until the account is brought up to date or it enters default.
DAY 270: Federal student loans enter technical default when payments are 270 days overdue. This extended period of delinquency can damage a borrower’s credit score before the loan goes into default.
Once a federal student loan defaults, the consequences become even more severe.
- The default is reported to the national credit bureaus, causing further damage to the borrower’s credit score.
- Instead of just owing several missed payments, the full loan balance becomes due immediately.
- The borrower faces escalating consequences the longer they let the default go unresolved.
- Tax refunds and other benefits can be seized and applied to the defaulted loan balance.
- The borrower’s wages may be garnished by their employer, with payments sent directly to the entity holding the defaulted loan.
- The borrower will lose eligibility for financial aid if they plan to return to school.
- Collection fees may be added, increasing the total amount owed.
(Source: StudentAid.gov.)
The reality is, many borrowers may be surprised by the consequences of failing to make timely payments on their federal student loans, especially after being shielded from such outcomes for several years. These borrowers were placed back into repayment in October 2023, but that doesn’t mean they've actually been making regular payments. According to the Consumer Financial Protection Bureau (CFPB), nearly half of student loan borrowers entering repayment for the first time were not actively repaying, and approximately 8.9 million borrowers have benefited from the On Ramp to Repayment, which prevented negative credit reporting and default up until now (Source: CFPB).
For those borrowers who have missed recent payments, they may be unaware of the consequences they now face. Some may even think they’ll be protected by new ED initiatives. ED has tried to address this concern by publishing a blog in October 2023, announcing that starting in January 2025, they will begin reporting late or missing payments to the national credit bureaus. Delinquent loans will also become slated for default in 2025 (Source: ED.gov).
It’s possible that borrowers who entered repayment for the first time since the payment pause may have no clear understanding of the consequences they are facing. Others may be skeptical, thinking they won’t face negative consequences for missed payments since they've gone without repercussions for years. However, whether prepared or not, borrower protections from missed student loan payments have expired.
