Penalties for Missing a Single Student Loan Payment

Summary

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WSJ Your Money Briefing

Episode: Penalties for Missing a Single Student Loan Payment
Date: October 28, 2019
Host: J.R. Whalen (The Wall Street Journal)
Guest: Cheryl Winokur Monk (WSJ Contributor)

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Episode Overview

This episode focuses on the significant consequences of missing even a single student loan payment—an issue affecting more than 40 million Americans. J.R. Whalen interviews Cheryl Winokur Monk to break down the penalties for both federal and private student loans, delineate immediate and long-term repercussions, and advise borrowers on best practices when facing repayment difficulties.

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Key Discussion Points & Insights

1. The Scale of Student Loan Debt (02:31)

• Student loans are the second largest debt category in the U.S. (after mortgages).
• Americans carry a combined $1.5 trillion in student loan debt, with average individual balances near $30,000.

2. Distinguishing Federal vs. Private Loans (03:05)

• How to Identify Your Loan Type:

  • Borrowers should check the National Student Loan Data System (NSLDS) for a list of their federal loans.

  • Match those to the loans on your credit report via Equifax, Experian, or TransUnion.

  • Loans not listed in the NSLDS are likely private.

    Cheryl Winokur Monk [03:05]:
    "The loans that aren't listed in the National Student Loan Data Systems database are most likely private loans."

3. Immediate Impact of Missing a Federal Loan Payment (03:30)

• A federal loan becomes delinquent the day after a payment is missed.

• The account remains delinquent until the past-due amount is resolved or special arrangements are made (e.g., deferment, forbearance, or changing the repayment plan).

  Cheryl [03:30]:
  "With federal loans, a borrower becomes delinquent the first day after missing a payment."

• Delinquency status persists, affecting credit and eligibility for future benefits.

4. Default on Federal Loans—Especially Perkins Loans (04:01)

• Most federal loans do not go directly into default after one missed payment; however, Federal Perkins Loans can default immediately after one missed payment.

  Cheryl [04:01]:
  "Borrowers who have a Federal Perkins loan... could be deemed in default immediately after missing just one payment."

5. Federal Default Consequences (04:11)

• Loss of access to deferment and forbearance.

• Ineligibility for alternative repayment plans.

• Entire loan balance and interest may become due immediately.

• Wage and tax refund garnishment possible.

• In at least 18 states: suspension of driver's and/or professional licenses.

  Cheryl [04:47]:
  "...default on federal loans can mean suspension of a driver's license or professional license. So it's a pretty big deal."

6. Private Loans: Stricter Penalties Vary by Lender (05:05)

• Some private loans enter default after just one missed payment; others after longer delinquencies (e.g., 120 days).

• Terms can only be confirmed by reading the loan's promissory note.

  Cheryl [05:05]:
  "Some lenders consider private loans to go into default as soon as the borrower misses a payment. Or...after borrowers are delinquent for, say, 120 days—you really have to read your promissory note."

• Upon default:

  • The full loan balance becomes due immediately.

  • Co-signers become liable.

  • Accounts may be sent to collections and reported to credit bureaus.

  • Additional collection charges may be applied.

    Cheryl [05:24]:
    "Once a borrower is in default...the lender will also seek repayment from the loan's co-signer, if there is one...collection charges or all sorts of negative consequences..."

7. Statute of Limitations for Collection on Private Loans (06:00)

• Statutes of limitations vary by state; typical range is 3–10 years, but can be up to 15 years.

• Six years is most common, but borrowers should verify their own state's rules.

  Cheryl [06:00]:
  "The time period varies from state to state. It can be up to 15 years, but usually it's from three to 10 years. And six years is really the most common."

8. Options When Borrowers Can't Pay (06:31)

• Immediate contact with the loan servicer is crucial.

• Federal and private servicers can offer solutions but aren't obligated to do so.

• Inquire proactively: repayment arrangements may help avoid negative credit and legal consequences.

  Cheryl [06:31]:
  "Any borrower...should really call the loan servicer first because there may be something the servicer can do to help the borrower get back on track..."

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Notable Quotes & Memorable Moments

• Cheryl [04:47] (On license suspension):

  "...default on federal loans can mean suspension of a driver's license or professional license. So it's a pretty big deal."

• J.R. Whalen [05:21] (Comparing to credit cards):

  “These penalties are a lot different than missing a credit card payment.”

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Important Timestamps

• [02:31] – Size and scale of U.S. student debt.
• [03:05] – How to determine whether your loan is federal or private.
• [03:30] – What happens immediately after missing a payment on a federal loan.
• [04:01] – Default rules for Federal Perkins Loans.
• [04:47] – Consequences in some states: loss of licenses.
• [05:05] – Penalties with private loans and the importance of reading the promissory note.
• [06:00] – Statute of limitations on collection of private loans.
• [06:31] – Steps to take when unable to make payments.

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Summary Table: Federal vs. Private Loan Consequences

| Loan Type | Delinquency Trigger | Default Trigger | Immediate Penalties | Additional Risks | |-------------------|---------------------------------|----------------------|-----------------------------------------------|--------------------------------------------| | Federal | 1 day after missed payment | Perkins: 1 missed; others: longer | Loss of deferment/forbearance; immediate full balance due | Wage/tax garnishment, loss of licenses | | Private | Depends on lender (1-120 days) | As specified in contract | Immediate full balance due; co-signer liable | Collection charges, co-signer consequences |

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Closing Advice

• Be proactive: Always reach out to your loan servicer at the first sign of trouble, whether you have federal or private loans.
• Understand your loan terms: Know whether your loan is federal or private, and read the promissory note for private loans.
• Know state laws: For private loans, be aware of your state's statute of limitations for debt collection.

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This episode offers a straightforward and comprehensive look at why even one missed student loan payment matters—and what steps borrowers should take to protect their financial futures.

Transcript

[Charles Schwab Podcast Host]

This episode is brought to you by Charles Schwab Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[Charlie Turner]

This is your Money Briefing. I'm Charlie Turner at the Wall Street Journal in New York. More than 40 million Americans owe money for student loans, and missing even one payment can have a big impact. The Wall Street Journal's J.R. whelan talks with contributor Cheryl Winaker Monk about the penalties that some federal and private lenders may levy. First, here are some top money in market stories. The Wall street journal says Charles Schwab's 0 commission gamble is paying off. On October 1st, the San Francisco based online brokerage said it was slashing commissions on online stock trades to zero, an announcement that rattled the E broker industry and triggered a nearly 10% one day drop in Schwab stock. Since then, shares of Charles Schwab have recovered nearly all their losses and are now just below where the stock price was on September 30, the day before the announcement. Schwab's rivals have also recovered, but not as strongly. Both E Trade and TD Ameritrade also cut commissions to zero in the wake of Schwab's move. The relative strength of Schwab reflects differences in its business model. As the largest of the three big publicly traded E brokers, Schwab is the least dependent on trading commissions deriving more of its revenue from banking. Americans are still fairly optimistic about their own job situations and financial health, but they're more worried about the economy than they were last year, according to According to a consumer sentiment survey, The University of Michigan's index of consumer sentiment was revised down to 95.5 in October from an initial reading of 96. That's nearly identical to the 2019 monthly average, but well below the post recession peak of 101.4 set in early 2018. The survey found that fewer Americans expressed anxiety about the festering trade dispute with China in October than they did in September, when President Trump upped the ante with a vow to raise tariffs again. Trade tensions eased in October, however, after the US And China resumed negotiations.

[J.R. Whalen]

After mortgages, Student loans are the second largest debt category. Americans currently carry $1.5 trillion in student loans, and the average balance runs close to $30,000. Some borrowers miss payments from time to time, and the penalties can be Severe, like going into delinquency status after missing just one payment. Wall Street Journal contributor Cheryl Winiker Monk joins us to explain. So, Cheryl, penalties vary depending on if the student has a federal or a private loan. Is there a quick way to find out what type of loan you have?

[Cheryl Winiker Monk]

Yes. Borrowers should go to the National Student Loan Data System to get a list of their federal loans. Then they can match up those loans with the ones listed on their credit report from one of the three credit reporting companies, Equifax, Experian, TransUnion. The loans that aren't listed in the National Student Loan Data Systems database are most likely private loans.

[J.R. Whalen]

On federal student loans, what happens if a borrower misses a payment?

[Cheryl Winiker Monk]

Well, with federal loans, a borrower becomes delinquent the first day after missing a payment. So even if the borrower misses his payment and then starts making payments again, that account remains delinquent until the borrower repays that past due amount or makes other arrangements. So those other arrangements might include deferment, forbearance, which let you temporarily halt or reduce monthly payments, or changing repayment plan.

[J.R. Whalen]

But there are types of federal loans that put a borrower in default with just one missed payment. Right.

[Cheryl Winiker Monk]

Borrowers who have a Federal Perkins loan, which not everyone will, but borrowers who have this specific loan could be deemed in default immediately after missing just one payment.

[J.R. Whalen]

And so what happens then? Can the government go and garnish wages?

[Cheryl Winiker Monk]

Potentially. The government has a lot of options if you're in default. Once you're in default, borrowers can no longer receive deferment or forbearance, and they lose eligibility for other benefits, such as choosing a repayment plan. The other issue is that the entire unpaid loan balance and any owed interest will be due immediately. And then, of course, another increasingly likely consequence is wage garnishment. And even tax refunds can be garnished as well.

[J.R. Whalen]

And the penalties can go far beyond that. In some states, a borrower's driver's license can be in jeopardy.

[Cheryl Winiker Monk]

That's true. And professional licenses as well. There are at least 18 states where default on federal loans can mean suspension of a driver's license or professional license. So it's a pretty big deal.

[J.R. Whalen]

Now, let's talk private loans. It pays to really read the fine print because in some cases the penalties on private loans are very severe.

[Cheryl Winiker Monk]

It can be. It really depends on the lender. Some lenders consider private loans to go into default as soon as the borrower misses a payment. Or some lenders consider private student loans to be in Default after borrowers are delinquent for, say, 120 days, you really have to read your promissory note.

[J.R. Whalen]

You know, these penalties are a lot different than missing a credit card payment.

[Cheryl Winiker Monk]

Once a borrower is in default on a private student loan, the lender is going to require immediate payment of the full balance. The lender will also seek repayment from the loan's co signer, if there is one. So if there's a parent or a spouse or anybody, that person would be responsible for repayment. The borrower's account could be referred to a debt collector, and defaulted loans can be reported to the national credit bureaus. There could be collection charges or all sorts of negative consequences of defaulting on a private student loan.

[J.R. Whalen]

But isn't there a statute of limitations on unpaid student loans if they go unpaid for a certain amount of time?

[Cheryl Winiker Monk]

That's generally true. The time period varies from state to state. It can be up to 15 years, but usually it's from three to 10 years. And six years is really the most common.

[J.R. Whalen]

So after let's say six years, that private company could not come after the borrower.

[Cheryl Winiker Monk]

That's true. But again, it depends on the state. You have to understand the laws of the state to know what the statute of limitation is.

[J.R. Whalen]

Okay, so what can somebody do if they're in a tight spot and they can't make payments or they can only pay some of their monthly balances? I mean, can these loan companies work with the borrower?

[Cheryl Winiker Monk]

They can, but they're not under obligation to. Any borrower who is having trouble making payments, whether this is federal or private, should really call the loan servicer first because there may be something the servicer can do to help the borrower get back on track without going into these really other negative consequences.

[J.R. Whalen]

All right, that's Wall Street Journal contributor Sheryl Winokur Monk joining us here on the line. Cheryl, thanks for coming on the show.

[Cheryl Winiker Monk]

Thanks for having me.

[J.R. Whalen]

And that's your Money Briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Charles Schwab Podcast Host]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.