Missing a student loan payment is easy to do. Misplaced mail, holiday travel, or reaching the end of a grace period may result in an unpaid bill. Regardless of the reason, your student loan is considered delinquent after a single missed payment. One missed payment can lead to two, and before long you may find that your situation has snowballed into default.
Borrowers are 12 times more likely to miss a payment on their student loans than their credit cards: Student loans have a delinquency rate of 27.3 percent, versus 2.15 percent for credit cards. The prevalence of missed payments is significantly higher for student loans than for all other types of debt, including auto loans and mortgages, according to a recent report from the Federal Reserve Bank of St. Louis. Since 2012, 11.8 percent of borrowers have defaulted, or missed 270 days of payments, on their student loans.
When it comes to delinquency, paying something may be the same as paying nothing. Depending on the loan servicer, a payment can be considered missed when any amount less than the required payment is submitted. That was certainly the case with Erin Fox, who defaulted on her student loan in earlier this year. “Due to my own ignorance I thought that paying some amount was going to protect me. I was wrong and I ended up in default,” says Fox, who recently started a crowdfunding campaign to help eliminate her student debt burden.
Jeffery Scholnick, a lawyer based in Maryland who has helped many clients get a handle on their student loan debt, says that when a notice of default arrives, it’s important to take action sooner rather than later.
Here are three steps for getting student loan debt under control:
1. Assess The Damage
Start by logging into the National Student Loan Data System of Students to find out the current balance and interest rate for all loans, as well as the current servicer for each loan. Use a checklist to keep track of the servicer’s contact information and loan details.
Scholnick says it also helps to find the original loan contract, if possible. “Sometimes the debt is bought by a new company, which may not be aware of the original documents,” he says. Mistakes are common, so it’s important to compare documents to check for inconsistencies like incorrect interest calculations. Identifying errors may allow for more favorable settlement terms later on, Scholnick says.
2. Contact The Case Manager
All student loans, whether in default or not, have a designated case manager, or file manager. “When [a borrower] starts to run into problems, they should contact the file manager,” Scholnick advises. “I know it’s not easy, and I know they deal with people that are nasty. But they should try to keep in touch," he says.
The case manager is the point person for determining a realistic resolution. Honesty is key, as is patience and politeness. Collection agency employees are bound by the Fair Debt Collection Practices Act, which protects borrowers against abusive, unfair or deceptive practices by debt collectors.
The Department of Education has a Default Resolution Group that can answer many questions associated with payment plans and settlement options. Scholnick says knowledge levels vary between representatives. “It’s always worth asking and then asking again and then asking somebody else,” he says.
3. Analyze The Options
One way or another, borrowers will have to repay the loan balance. “Bankruptcy is rarely an option for these debts,” Scholnick says. Payment plans are the most likely outcome, although settlement offers may be possible for borrowers who are able to come up with a lump sum. As a last resort, the federal government may withhold tax refunds or garnish wages by 15 percent.
Scholnick recommends having a third party intervene, if need be. “Try to get somebody to be your spokesperson,” he says. It may be worth paying $1,000 or so to an attorney familiar with student loan defaults who can negotiate a compromise more easily than an overwhelmed borrower. Alternatively, ask an assertive friend, parent or financial adviser to help navigate the process. A knowledgeable intermediary can translate complicated steps and bring calm and clarity to a stressful situation.