3 Ways To Avoid Defaulting On Your Student Loans Ahead of Collection Efforts

The Department of Education is restarting student loan collections starting May 5, but there are ways for borrowers who have missed a few payments to avoid defaulting.

About 4 million borrowers are currently in late-stage delinquency, meaning they have not made a payment for 91 to 180 days, according to the Department of Education.

Federal student loans are considered in default after 270 days of non-payment. Experts say borrowers should avoid defaulting, as they could have their wages garnished and many resolution options are unavailable.

“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 who are avoiding monthly payments because their current repayment plan is too high now have the option to move into a more affordable plan.

Less than a month ago, Federal Student Aid (FSA) reopened applications for income-driven repayment (IDR) plans after previously taking them down because a court ruling called into question parts of some IDR plans.

This week, the department announced that loan servicers will begin processing IDR applications next week and that the process of applying to the more affordable plans will soon be simplified.

Borrowers can use the FSA Loan Simulator to find the cheapest repayment plan for them. Once they apply, the borrower will be placed in administrative forbearance until their application is processed.

Set Up Automatic Payments

Another option for borrowers to avoid missing payments is signing up for autopay through their federal student loan servicer.

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.

Utilize Forbearance or Deferment

If borrowers cannot afford their payments, even with a more affordable repayment plan, they can apply for forbearance or deferment to temporarily pause their payments.

Deferment and forbearance are available for economic hardship or other circumstances that make it hard for a borrower to pay monthly. These options allow for a temporary suspension of payments, but borrowers can only pause their payments for a certain amount of time.

Additionally, interest will still accrue for some loans while in deferment or forbearance. The main difference between the types of payment pauses is interest accrual.

“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.