Paying off your student loans can cause a lot of stress, especially if you’re on a tight budget. But trying to skip out on them has serious consequences—and is almost always a financial mistake.
While federal loan borrowers haven’t had to make payments for the past few years, that break will be coming to an end in October 2023. Even without the burden of federal loan payments, you may be struggling to keep up with your private student loan bills, which have been chugging along throughout the Covid-19 pandemic.
As challenging as paying off student loans can be, not paying them is usually even more painful. Missing payments can rack up penalties and fees, which can make your debt more expensive. Your credit score will take a hit. If you default on federal student loans, the government could garnish your wages, tax refund and even Social Security benefits.
Read on to understand the details of not paying your student loans:
What happens if you don’t pay your student loans?
The consequences of not paying your student loans can be harsh and long-lasting, but you won’t see them happen right away.
You usually have time to make up your late payments and get your progress back on track. For the first year after payments resume in October, the Education Department is giving borrowers extra leeway. Missed, partial or late payment on federal loans won’t hurt your credit, lead to default or be sent to collections agencies.
“Borrowers have great options to prevent default,” says Julie Fresne, senior director of Student Financial and Career Advising Services at the Association of American Medical Colleges. “The key is to communicate with their servicer or lender.”
What happens when you don’t pay your student loans varies by loan type: Defaulting on federal student loans can follow you for life, whereas private student loan collections efforts have a statute of limitations.
Here’s a closer look at what happens when you don’t pay your federal student loans, followed by what happens when you don’t pay your private loans.
What happens if you don’t pay your federal student loans?
Since March of 2020, borrowers haven’t had to pay their federal student loans thanks to the emergency forbearance. Payments are set to resume in October 2023. Interest will start accruing on Sept. 1, 2023.
Normally, though, missing payments on your student loans means your loans go into delinquency.
- After your payment is 30 days late, your loan servicer will charge you a late fee up to 6% of the amount due.
- If your payment is 90 days late, your servicer will report your loan as delinquent to the credit bureaus.
- After 270 days of missed payments, your loans go into default.
You should strive to avoid going into default, since your options will shrink and the penalties will become even harsher.
- Your entire loan balance becomes due. You’ll be expected to pay back the amount you owe in full, plus all the interest that has accrued. This is known as loan acceleration. In some cases, a collections agency may settle the debt for a smaller amount.
- You’ll lose eligibility for Federal Student Aid benefits. This means you can’t apply for federal deferment or income-driven repayment plans. You also won’t be eligible for additional financial aid, including grants.
If and when your loan holder orders it, you could also experience the following:
- The government can garnish your wages. The government has wide-reaching powers of collection and can demand that your employer withhold up to 15% of your pay to use toward your student debt.
- Your tax refund and Social Security benefits can be garnished, too. The government can also seize your tax refund and Social Security payments to recoup the debt.
- You could be brought to court. If you lose in court, you’ll be required to pay back the debt, plus any fees. “That could include legal fees, court costs and interest,” says Boston-based student loan lawyer Adam Minsky.
What’s more it is difficult, although not impossible, to discharge student loans through bankruptcy. You’ll need to prove your student loans cause undue hardship, meaning you wouldn’t be able to maintain a minimal standard of living if you had to pay off your loans.
“Not paying your student loans is one of the worst financial decisions you can make,” says Robert Farrington, student loan expert and founder of The College Investor. Here’s what else happens at this point:
What happens if you don’t pay your private student loans?
The consequences of not paying your private student loans can also be severe, but a private lender can’t go quite as far as the federal government. The timeline will vary by lender, but most consider your loans to be delinquent the first day you miss a payment and in default after two to three months.
Here’s what can happen:
- You’ll get charged late fees. This may be a flat fee or a percentage of your payment amount.
- Your debt may get sold to collections. As with federal student loans, a collections agency may contact you frequently to pay back the loan, along with any late fees and collections fees.
- There will be damage to your credit score. Your default will show up on your credit report and be a red flag to future lenders. Student loan defaults typically stay on your credit report for seven years.
- The lender can take you to court. If the lender’s lawsuit is successful, they could get permission to garnish your wages.
Fortunately, unlike federal loans, some private loans can be discharged through normal bankruptcy proceedings. There is one silver lining, too—private student loans have a statute of limitations. The statutes vary by state, but most last from three to 10 years after you’ve defaulted. Once this amount of time has passed, the collections agency no longer has legal recourse to recover the debt.
How the new Fresh Start program can help borrowers in default
Over the past three years, the Department of Education’s Office of Federal Student Aid, which provides financial aid, including student loans, stopped collections on federal student loans in default. It ceased collections calls and billing statements, paused interest and stopped garnishing wages, tax refunds and Social Security benefits.
More recently, the Education Department announced a temporary program called Fresh Start, which offers a new way for borrowers in default to get their loans back into good standing. By signing up for this program, your loans will re-enter good standing status. The Fresh Start program will be available for one year after the payment pause ends.
You’ll sign up for a new repayment plan, such as an income-driven repayment plan, as well as regain access to federal forgiveness programs and benefits, such as deferment and forbearance. Plus, you’ll once again become eligible for federal financial aid, which may be welcome if you want to go back to school or finish your degree.
“The Fresh Start program is likely the best pandemic-era student loan program to actually fix structural problems hurting student loan borrowers,” says Farrington.
To sign up for Fresh Start before the student loan moratorium ends, sign into your account at myeddebt.ed.gov or call 1-800-621-3115 (TTY number is 1-877-825-9923). You can also contact your loan servicer for guidance.
What to do if you’re falling behind on student loan payments
If you’re worried about missing student loan payments, it’s important to act fast before your loans go into delinquency or default. Here are some steps that can help:
- Contact your loan servicer. Let them know you’re struggling and ask how they can help. This is especially useful if you have private student loans and want to know about your options (which may include some of the other bullets below.)
- Sign up for income-driven repayment. Plans such as Income-Based Repayment and Pay As You Earn adjust your monthly payments to a percentage of your discretionary income and stretch out your loan terms over 20 or 25 years. If you still have a balance at the end, it will be forgiven.
- Consider deferment or forbearance. If you’ve run into financial hardship or are going back to school, you might qualify to postpone payments. Keep in mind, though, that interest might continue to accrue on your loans.
- Pursue student loan forgiveness. Depending on your profession, you could qualify for partial or even full forgiveness of your loans. Many states also offer loan repayment assistance to qualifying borrowers.
If you’ve already defaulted on your student loans, the Fresh Start program could help you get them back into good standing. Federal loan rehabilitation and consolidation are also options for getting out of default and back into active status with your loans.
“While it can feel overwhelming, barring highly unusual circumstances, there’s no reason that borrowers should expect or feel like they will not be able to manageably repay their student loans,” says Fresne.
Whether you’re on the verge of missing payments or have already gone into default, exploring your options and facing the situation head-on can help you get back on track.
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