Deferment

  • When you were in school your federal loans were in deferment where there is no obligation to pay your student loans or associated interest yet
  • If you received Subsidized loans or Federal Perkins loans, any accrued interest was paid for by another party during deferment
  • If you received Unsubsidized loans including PLUS loans, you have been accruing interest on these loans since the day they were disbursed

Repayment

  • Most student loans have a 6 month grace period after graduation. After the grace period ends, you enter the repayment phase where you are obligated to pay a minimum amount each month based on your chosen student loan repayment plan. You also begin accruing interest on subsidized loans.
  • If you are unable to make your monthly payments due to financial hardship, you may be eligible for forbearance. This will allow you to temporarily stop or reduce your monthly payment obligation. Keep in mind, you will be responsible for accrued interest during this period.
  • At the end of your forbearance period any accrued interest will capitalize. Meaning your interest will now be considered part of your principal. You will essentially be charged interest on interest. This is where the power of compound interest works against you. Ultimately, capitalization is something you want to avoid. Capitalization also occurs at the end of your grace period.

Consequences

  • Delinquency is a consequence of late payments. Depending on the lender, if you remain delinquent for 45 – 90 days, you will be reported to the three credit unions (TransUnion, Equifax, and Experian). This will negatively impact your credit score requiring months of on-time payments to be in good standing. Forget about being approved for credit cards, renting, or purchasing a home. Even signing up for cell phone plans can be expensive or extremely difficult. Being delinquent may also dig you in a further hole with late fees depending on your lender. If you borrowed from Sallie Mae, they charge 6% of your minimum payment once the balance is 15 days late.
  • If you fail to make payments on your loan for 270 days, you have defaulted on your loans and can have serious consequences including having your entire unpaid principal and interest being immediately due as you are no longer eligible for any payment plan (including the standardized 10 year plan). You will also have your income tax refunds withheld, you may also have your wages garnished or be taken to court. There are ways to get out of default, such as transferring your loan to a private lender. Refer here for more information regarding student loan delinquency or default. 

You will not have worry about delinquency or defaulting on your loans if you use my tips on getting rid of your loans quickly!

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