The student loan forberance is set to expire September 1, 2023. Payments will become due again, but not everyone may have enough cash to cover the monthly payments. It’s a good idea to anticipate the return of student loan payments and pick up a side hustle, trim your expenses, and pursue career advancement. This guide will explain what happens if you don’t pay student loans and some steps you can take to repay your loans.
9 consequences if you don’t settle your student loans
What takes place if you cannot pay student debt depends on the context surrounding your student loan payments. These are some of the possible outcomes of not settling your student loans.
1. You’ll be considered delinquent
The government will consider you delinquent on a federal loan if you do not make a payment within 90 days. Delinquency can result in penalties, late fees, and a lower credit score.
2. Your account will be in default
If you do not make a loan payment within 270 days, you can default on a loan. Defaulting doesn’t mean you avoid debt payments. A collection agency will be responsible for collecting payments, and you will lose federal benefits from your former federal student loan. Your debt will continue to grow throughout this process.
3. Your entire loan balance will become due
The federal government or a private lender could move the due date of the loan and make your entire balance due immediately. You can either pay the balance in full, rehabilitate the loan, or consolidate your student debt.
4. You may be denied federal financial aid
You may lose out on federal financial aid, grants, the ability to switch to an income-driven payment plan, and other perks if you miss student loan payments.
5. Your wages may be garnished
The government has ways to collect money if borrowers fall behind. The government can garnish your wages if you do not make student loan payments. Private lenders can also garnish your wages. Garnishments result in a percentage of every paycheck going to the loan.
6. Your tax refunds may be withheld
If you do not pay a federal student loan, the government can hold onto your tax refund and use that money to cover the loan payments. Private lenders do not have this path to remediation.
7. Your Social Security benefits may be garnished
In some cases, the government can garnish a portion of your Social Security benefits to cover student loan payments. This garnishment follows the same concept as getting wages garnished.
8. Your credit score will be negatively affected
Your credit score may decrease with every late payment, and ignoring debt could have a worse effect on your score. A low credit score makes it difficult to get future loans, whether you need a personal loan or a mortgage. You may also have a harder time getting a credit card, and even if you get to borrow money, you may face a higher interest rate.
9. Your co-signer may be held responsible
If a co-signer helped you get a federal student loan, that co-signer becomes financially responsible for making the loan payments. The late payments will negatively impact their credit, and making your student loan payments will hurt the co-signer’s finances. The extra stress on the co-signer can strain the relationship you have with that person.
What steps should you take to repay your student loans?
If you are falling behind on student loan payments, you have several ways to catch up. Here are some of your options.
1. Apply for student loan forgiveness or discharge
The government has several programs that can help borrowers receive student loan forgiveness or more reasonable payment plans. Here are some of the programs that get students out of debt.
- The Public Service Loan Forgiveness Program: Qualifying borrowers working for the government or nonprofit organizations full time can get their debt forgiven after 120 monthly payments.
- Grad PLUS Loan: Borrowers in qualifying positions may become eligible for student loan forgiveness.
- Income-Based Repayment (IBR): The government determines your monthly payment based on your income and family size.
- Pay As You Earn (PAYE): The monthly payment is generally 10% of your discretionary income divided by 12. You will never have to pay more in one month than the 10-Year Standard Repayment amount.
- Revised Pay As You Earn (REPAYE): The government assesses your income and family size, just like a PAYE plan. This loan can have a 25-year term and has no monthly payment limit.
- Teacher Loan Forgiveness: Qualifying teachers with student debt can get their loans forgiven. The government outlines which teachers qualify for student loan forgiveness.
- Total and Permanent Disability Discharge (TPD): A borrower who receives a TPD discharge no longer owes student debt. It isn’t worth incurring a disability just to get out of debt, but if you get disabled at work or somewhere else, know that you have this option. You don’t want to be stuck with a financial burden if you know it’s no longer required.
2. Take advantage of an income-driven repayment plan
An income-driven repayment plan sets the monthly payment based on your income and family size. An income-driven repayment plan can result in a lower monthly payment that fits better into your budget.
3. Consolidate your student loans
Student loan consolidation lets you pay your balance in full and end up with a new loan. You can adjust the term duration and add more years on the back end to lower your monthly payment. Depending on available loans, you may also be able to secure a lower interest rate with consolidation. You also get to put the late payments behind you and start fresh with a new loan.
4. Explore the option of deferring your student loans
Student loan deferment lets you temporarily pause your student loan payments. You can stop making payments for up to three years, but you still owe the balance. The government outlines on its website what can make you eligible for a student loan deferment. You can use the deferment to build your cash reserves so you can adequately cover loan payments when they resume.
5. Consider student loan forbearance
Student loan forbearance lets you temporarily pause payments or make smaller payments. Interest will accrue while the loan remains in forbearance. The government recommends considering an income-driven payment plan instead.
6. Refinance your student debt
Refinancing your federal student loan can make the monthly payments more manageable. You can extend the loan’s term and possibly get a lower interest rate. You can only refinance your debt with a private lender. If you get a private loan, you lose out on federal benefits, such as an income-driven payment plan. A refinance can reduce your monthly payments and wipe away late payments. But you have to consider whether a refinance is worth losing the federal benefits.
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Getting back on track with student loans
Student loan payments will resume soon, and getting a head start can make them more manageable. If you cannot make loan payments on time, knowing your options can limit the impact on your finances and credit score.
Is there a statute of limitations for student loans?
Federal student loans do not have a statute of limitations. Private student loans have a three to ten year statute of limitations, depending on the state.
Can bankruptcy erase my student loan debt?
It’s possible but difficult to erase your student loan debt through bankruptcy. You must demonstrate that repaying the loan would cause undue hardship to get your debt erased.
Should I communicate with my lender if I can’t make payments?
If you cannot make payments, you should communicate with your lender. The lender may help you through the process or work out a new payment plan.