Let’s say you didn’t make your student loan payment. What could happen? What happens if you default on a student loan?
Well, when you don’t make your student loan payment that’s when it gets interesting. Seriously, depending on how far behind your payments are, you can end up in some serious financial trouble.
This guide will detail what happens if you don’t make your student loan payment and tips for improving your situation and paying off your student loans.
College graduates frequently find themselves in a situation where they are unable to make their student loan payments. One of the biggest financial pressures that many young Americans bear is student loan debt. What happens, though, if student debts are not paid?
Your credit score will suffer, it will be more difficult for you to obtain future credit, and your lenders may even sue you if you don’t make any payments on your student loans.
It’s important to pay your student loans on time or get assistance if you’re having financial difficulties because failing to do so can have significant short- and long-term effects.
What Happens If You Don’t Make your Student Loan Payment?
Your total financial situation may be seriously harmed if you don’t make payments on your federal or private student debt.
Your loan defaults the day after a missed payment and remains in default until all past-due payments are made. Each missed payment could incur a late fee as well.
Federal student loans that are past due are not recognized as delinquent until they are more than 90 days past due. You still have time to make up the difference before it hurts your credit. Private loans, however, may already be 30 days past due before your lender decides to report them to the credit bureaus.
If you have a history of late payments on your credit report, obtaining credit cards, borrowing money, or even renting an apartment may be more challenging.
If you are approved for a loan, expect to pay higher interest rates. The consequences get worse the longer your loans are past due. Your direct federal loans go into default when they are more than 270 days past due.
Other loans experience this procedure considerably more quickly. Federal Perkins loans can default immediately after a missed payment, but private student loans can do so after 120 days.
Once you go into default, there could be a lot of negative effects. In comparison to just a late payment, your credit will suffer significantly more damage. Wage garnishment and other legal actions are also possibilities.
The Outcome of What Could Happen if You Don’t Make Your Student Loan Payment
If you don’t make your monthly payments, your finances could suffer from various aspects, regardless of whether it’s student loan payments or other debts. Here is what could follow if student loans are never repaid.
- Have a Bad Effect on Your Credit
As we already mentioned, your credit score might be impacted by late payments. Going into default, though, can further exacerbate the problem and lower your credit score.
It may lower your credit score into the “bad” category, even if it was previously good.
- Cosigners are Involved
A cosigner is equally liable for the student loan repayment. If you don’t make payments, the lender will turn to your cosigner, who will then be required to start paying.
Additionally, it may have a negative effect on the cosigner’s credit, making it more challenging for them to refinance current loans or qualify for new ones in the future.
Cosigners are frequently used while obtaining private student loans. A cosigner, however, might not be aware of what might occur if you don’t make your student loan payments.
- Deduct from your tax refund
In some circumstances, the government may confiscate your tax refund if you default on a federal student loan.
Also, several states have regulations permitting state guarantee organizations to seize your state income tax refunds. This could be a significant financial blow if you extensively rely on your tax refund.
- Garnishment of Social Security benefits
For federal student loans, going into default might have a negative impact on your retirement plan. The government may deduct up to 15% of your Social Security payout, a practice known as Social Security garnishment. You should be aware of this for federal student loans, even though it doesn’t apply to private student loans.
- Charges on Late Fees
Federal student loan late fees can be up to 6% of the amount that was due and unpaid if you’re 30 days overdue. Therefore, if you owe a late payment of $350, you might have to pay an additional $21 on top of your regular student loan payment.
Similar late costs apply to private student loans, which are not standardized. In this case, you’ll pay whichever is higher: a fixed fee or a predetermined percentage.
- A property lien
The government may file a lawsuit if a borrower of federal student loans defaults in some circumstances. Liens prevent you from legally selling, refinancing, or transferring property ownership. You must first pay the lien in order to clear the title.
- A lower credit ranking
A lender may report a problem to credit bureaus after a predetermined period, which could harm your credit score. This may have an effect on your life in several ways, making it more challenging to qualify for credit cards, purchase a car, and obtain a mortgage.
If your application is accepted despite having bad credit, your interest rates will probably be higher. When you are 30 days past due for private student loans and 90 days past due for federal student loans, loan services will notify credit bureaus about your late payments.
- Become ineligible for further financial aid
Once you default on a federal student loan, you will no longer be eligible for additional federal aid. Your academic goals will likely be placed on hold as a result, and in order to start receiving help again, you will need to get out of default.
- Garnishment of wages
A lender can withdraw up to 15% of each paycheck through wage garnishment to collect on your federal student loan without going to court.
Garnishments for private student debts might reach up to 25% of your income. They may go on doing this until your student loan is fully repaid or you bring it out of default. Your inability to work due to this circumstance makes repayment much more challenging.
- Loss of loan benefits
Once you fall behind on your federal student loans, you are no longer eligible for deferments or forbearances.
Additionally, you won’t be allowed to pick your repayment strategy any longer; you can be forced to switch to an income-driven strategy. This consequently reduces your future repayment flexibility.
- Suspend your license as a professional
While not everyone may be affected, several states may even suspend your professional license if you default on your school loans.
A few professions that need a professional license include nurses, teachers, therapists, and electricians.
What Can You Do If You Can’t Pay Your Student Loan Payments?
You must take immediate action if you cannot afford to repay your student loans. You can try one or more of the following debt management alternatives.
- Federal Loan Consolidation
If you have federal loans, consolidating your debt with a direct consolidation loan is one approach to avoid default. To be eligible, you must make three consecutive monthly payments on time and enrol in an IDR plan.
- Alternative Payment plan
You might be able to sign up for an alternative payment plan if you are having financial difficulties but have not yet missed a payment. Those who have federal student loans may benefit from the following debt relief options:
- IDR plans (income-driven repayment): IDR sets your monthly payments based on the size of your family, your discretionary income, and a longer repayment period. Signing up for an IDR plan could significantly lower your payments if your income has decreased.
- Forbearance or deferment: You can use a forbearance or deferment to temporarily postpone your payments if you cannot make them due to a job loss, illness, or other financial emergencies. You might be eligible for a forbearance that lasts up to three years, depending on your situation.
Typically, private student loan lenders do not offer alternative payment plans, and private lenders have no legal requirement to provide financial assistance.
However, some lenders are willing to work with debtors and provide interest-only payments or payments with reduced monthly payments. Some creditors can let you delay payments for a few months if you have severe financial difficulty. To learn about your alternatives, get in touch with your lender.
- Individualized Treatment
Private lenders might have their methods out of default even though they won’t have the same rehabilitation programs as federal lenders. Get in touch with your current lenders to find out how to bring your loans current.
- Repayment of Student Loans
You might be able to settle your federal or private loans for less than you owe in some exceptional circumstances. Most of your unpaid debt must be paid off in one single sum, so this option might not be practical for many people.
Consider speaking with a student loan debt attorney to get counsel specific to your case and geographical location if you’re considering using a student loan settlement to get out of default.
You can find legal resources on the National Consumer Law Center’s student loan page. However, you might be accepted if you apply with a co-signer with excellent credit.
- Rehabilitating Federal Loans
Loan rehabilitation is another option if you decide against consolidating your federal loans to get out of default.
With this strategy, you voluntarily and in writing commit to nine timely payments. Your loans will be brought out of default if you make nine payments on time within ten months.
- Student Loan Refinancing
Refinancing your student loans is another option if you have federal or private student loans to avoid default.
When you refinance your student loans, you apply for a new loan from a private lender and use it to settle your previous debt. Your debt will be reported as paid in full once you have repaid your existing loans, at which point you will no longer be in default.
You can choose a longer payback term to receive a lower monthly payment on the new loan, which will have different terms.
If you’ve ever missed a payment on a loan, your credit is probably already affected, making it challenging to get approved for a refinancing loan. You should consider freezing your student loan & getting financially back on track.
How long do I have to pay my student loans?
Generally, borrowers have between 10 and 25 years to repay their government loan in full. Shorter terms or larger loan amounts will result in higher monthly payments.
Are student loans forgiven after 20 years?
If you had not repaid your debt in full after 20 or 25 years, depending on when you received your first loan, the remaining balance would be forgiven. You may be required to pay income tax on the forgiven debt.
Will student loans be written off?
If you have a Plan 2 loan, it will be written off 30 years following the first April you were supposed to start making payments.
Can student loans take my house?
Your property could be seized if you fall behind on payments. Before taking any of your property, the bank must file a lawsuit against you and obtain a court order. Student loans are unsecured loans. They cannot take your house if you pay your school loans on schedule.
Now that you know the consequences of not paying student loans, you can devise a plan to avoid missing payments. Contact your lender if you believe your payments are excessively high or if you are concerned about your work or health.
You might be eligible for a payment plan with reduced instalments or even a payment suspension. Being proactive will keep you from defaulting and safeguard your credit.