You can face financial consequences from failing to pay your student loan. It starts with a huge hit with your credit score, but it doesn’t end there.
“The government has greater collectivity than your typical lender,” warns Persis Yu, deputy executive director and management council of the Student Borrowers Conservation Centre. “It costs a lot to (not pay).”
If you have federal loans, your income, tax refunds, or Social Security may be withheld by the federal government. Private lenders also have ways to earn money, such as selling their debts to collection agencies that could sue you in court.
If you are experiencing financial difficulties and are approaching student loan defaults, it is worth reaching out to lenders and exploring the possible forms of relief you may be able to use.
What happens if I don’t pay my student loan?
Whether it’s a student loan payment or another debt, your finances can be hit from multiple angles if you don’t make monthly payments.
What happens if my student loan is late?
A loan is considered arrears immediately after you miss a payment, but the lender or loan servicer may not report you late to the main credit department 90 days prior. If you miss a few payments, you may face the following outcomes:
- Decreased credit score. According to the Federal Reserve Bank of New York Liberty Street Economicsnew student loan delinquency can reduce your credit score by 150 points or more.
- Late fees. Delayed Payments – Ultimately, although not by the deadline, it can lead to slower payment fees. This amount varies from lender to lender and not all of them are charged, but it is very common to see either a flat deferred rate or a fee that represents the percentage of people missed payments.
What happens when student loans default?
After missing a few months of payments, or when your account is 270 days, your student loan enters a default. The specific timing and outcome of the default will vary from lender to lender. Potential results are:
- Federal student loans will be due soonEly. A process called acceleration will expire once your entire outstanding student loan balance reaches default.
- Lost future eligibilityid. If it is currently the default, you could lose future student aid, such as scholarships, grants, and federal student loans. The default loan on credit reports can make it difficult to buy a home, buy a car, or retrieve your credit card.
- Potential litigation. Your former lender can sell your loan to a debt collection agency. This can be sent by phone in an attempt to collect debt, even after the restrictions law has expired.
- Withdrawed tax refunds And profit. The government can withhold some of your refunds or Social Security benefits and apply the money to your student loan liabilities until the payments are up to date.
- Wage decorationt. The government may decorate your wages and apply them to your outstanding balances – sometimes up to 25% of your disposable income. You can do this until your loan is in good condition.
What if I never pay my student loan?
Some private lenders will end up abolishing their debts or facing restrictions laws, but it may take some time until that happens. For federal lenders, they can see wages, benefits and tax refunds for the rest of their lives. flat Advanced Student Loan Borrower Social Security benefits are withheld and therefore are not protected from decorations.
“There is no limiting law on federal student loans,” says Yu. “Essentially, the federal government can track you forever for the rest of your life to collect these loans.”
Without the law of limitations and the ability to award wages, benefits and tax refunds, the government says it has the ability to “wait and take the borrower (unpaid), and especially without much notice about tax refunds.”
After the borrower passes, the federal student loans will be discharged from hospital, but that may not be the case for private student loans, particularly co-signed loans. Read the terms of the loan and understand how they will be discharged.
Strategies for dealing with student loans before default
“For now, borrowers have the ability to get back on track until the moment 270 days ago,” says Yu.
If you are struggling to pay off your student loan, various repayment and forgiveness plans can help you keep your loan up to date without breaking your bank. Consider all your options before choosing the best plan for your needs.
Income-driven repayment plans
If you are struggling to pay off your student loan, you can register your federal loan with an income-driven repayment (IDR) plan. There are currently several different repayment options, so choose the best option that meets your needs.
With each plan, you will make monthly payments based on your discretionary income and family size. Payments accurately reflect your financial situation as information needs to be updated annually.
Please apply for postponement or tolerance
Student loan leniency or postponement allows you to temporarily suspend monthly payments without delinquency or default, but you must qualify. If you are tolerant, interest will continue to arise during that time.
If you are receiving a loan during the postponement, no interest will be charged. Federal student loans offer both deferral and generosity, but many private loans typically do not offer one or both.
Apply for loan forgiveness
There are several different student loan acceptance programs that may cancel student loan obligations if you meet certain eligibility requirements, such as fully and permanently disabled, engage in illegal practices or misleading eligibility requirements for schools that worked in the public services sector. There may be additional requirements. For example, in the case of public service loan forgiveness, you will need to make 120 qualifying payments on an income-driven repayment plan.
Debt snowball or debt avalanche
Debt removal plans may help you cut student loan debt faster, such as snowballs and debt avalanches.
- As for the snowman method, if the balance is at the very lowest first, apply all the reserve dollars to your debt, then move to the next lower balance once the initial balance is fully paid off.
- For the debt avalanche law, all reserve dollars are directed towards debt at the highest interest rate, then moved to debt at the highest interest rate.
Refinance
If you have high interest rates or a variety of private loans, we recommend considering refinancing your student loan. This allows you to consolidate your student loan into one loan with one fee and monthly payments. Additionally, the refinanced student loan rate is lower than current loans, which saves you money.
You can only refinance your loan from a private lender, so proceed with caution. Refinancing a federal loan means losing certain benefits, including the option to register with a tolerance, forgiveness and an income-driven repayment plan.
Strategies to get out of student loan defaults
According to Yu, two main ways borrowers can get out of student loans are loan consolidation or loan rehabilitation.
Student Loan Integration
Loan consolidation involves consolidating federal loans into new direct loans and repaying the new loan. You must agree to use an income-driven repayment plan. You can apply for integration through the Federal Student Aid website.
Student loan rehabilitation
According to Yu, loan rehabilitation requires nine consecutive payments in amounts negotiated with the education department. If you do that, you will be forwarded to the servicer. There, you may be eligible for income-driven repayments.
“One of the drawbacks of the program is that due to that period, many people don’t actually move to income-driven payments,” says Yu. “And it has a higher re-default rate… (these programs) rely on borrowers to then keep things all in place.”
Once the loan is rehabilitated or consolidated, it is essential to create a budget and limit any extra expenditures to meet your financial obligations. If you find yourself struggling again, reach out to the servicer as soon as possible.
Department appeal
“For some people, you really need to reduce the damage at this point,” says Yu. For those who can’t get out of default, she suggests calling the department for difficulties.
“It’s a way to stop wage ornaments and offsets from occurring at least temporarily. That’s not a long-term solution. But for those who need to stop this at this moment, in order to support their family and pay rent, it’s available.”
You may appeal by submitting a “Request for a Review” form or by submitting a written statement to the Ministry of Education’s Default Resolution Group within 65 days of the date stated in the Offset Intention Notice.
Student loan settlement
A student loan settlement occurs when you settle your student loan because it is less than what you owe. This option is much behind on student loans and may have already been harmed as your credit score can have a negative impact on your score.
To default and repay outstanding settled balances, you will need to pay a lump amount. Lenders don’t need to settle, but some are willing to consider reducing the resolution if it helps to collect a significant portion of the outstanding debt. This is not often recommended for a number of reasons as it requires a large amount of money to pay the debt and the government may tax the allowable amount.
Can I get bankrupt and get rid of my student loan?
The US bankruptcy law allows borrowers to be exempt from student loans if they demonstrate that not doing so would be “overly difficult.” However, it is difficult to prove excessive difficulty. Borrowers must meet three guidelines of excessive difficulty, known as the Bruner test.
- If you are forced to pay off your loan, you can prove that you cannot maintain a minimum standard of living.
- You demonstrate that difficulties persist for most of your loan repayment period.
- I made a sincere effort to pay off my loan before filing for bankruptcy.
However, you should recognize that it will be a difficult battle to prove that paying off your student loan will put you in an undue hardship.
Conclusion
Failure to repay your student loans can have catastrophic consequences for your finances, credit and future borrowing prospects.
If you are struggling, you are not alone. A 2024 pre-election survey of banks found that 29% of Americans view student loan debt as a national crisis. Not paying off your student loan will hurt you for years to come, so your best course of action must be a program that will get you on track.
