As a student or borrower, it’s important to understand the differences between federal and private loans. One area where these types of loans differ is in their late payment penalties. In this article, we’ll discuss what federal and private loans are, how they differ, and the penalties for late payments.
Federal loans
Federal loans are issued by the federal government and include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Federal Perkins Loans. These loans have several advantages over private loans, including fixed interest rates, income-driven repayment plans, and flexible repayment options.
Late payment penalties for Federal Loans
If you have a federal loan and you miss a payment, you’ll typically have a grace period of 9 months before your loan goes into default. During this time, your lender will likely contact you to remind you about your missed payment and offer you options to bring your account current.
If you fail to make a payment during this grace period, your loan will be considered in default. Once this happens, the entire balance of your loan becomes due immediately, and you’ll be responsible for paying the entire amount back.
In addition to the immediate repayment requirement, defaulting on a federal loan can have several negative consequences, including damage to your credit score, wage garnishment, and even legal action against you.
Private Loans
Private loans, on the other hand, are issued by private lenders such as banks, credit unions, and other financial institutions. These loans have fewer protections than federal loans, including fewer options for repayment plans and lower borrowing limits.
Late Payment Penalties for Private Loans
The late payment penalties for private loans can vary widely, depending on the lender and the terms of your loan agreement. In general, private lenders will assess a late fee if you fail to make a payment on time. This fee can range from a flat amount, such as $25, to a percentage of your outstanding balance.
In addition to late fees, private lenders may also report your missed payments to credit bureaus, which can negatively impact your credit score. If you continue to miss payments, your lender may also take legal action against you, including wage garnishment and lawsuits.
It’s important to note that some private lenders may offer forbearance or deferment options if you’re struggling to make payments. These options can provide temporary relief from payments, but they may also result in additional interest charges or fees.
