Student Loans: What happens if you don’t pay?
Navigating the complexities of student loan debt is an overwhelming reality for many graduates. With debts reaching up to $300,000 for some, the path to financial liberation appears formidable. The question of whether one can break free from the heavy chains of such debt is a common concern. It is clear that financial autonomy demands an active and deliberate strategy in managing debt. Given that external assistance is rare, it falls upon the individual to take control of their repayment plan. Neglecting student loans exacerbates the situation, leading to severe repercussions such as credit score damage, imposition of late fees, and direct garnishment of wages. In extreme cases, legal action may ensue.
Fortunately, there are strategies to circumvent these dire consequences and regain control of student loan obligations. By employing effective debt management techniques, individuals can navigate their way towards financial stability and peace of mind.
If you don't pay your student loans, there will be consequences.
Federal Student Loans
Failing to pay federal student loans can lead to serious financial consequences. The U.S. Department of Education, which owns these loans, employs loan servicers with governmental authority to collect payments. Here's a breakdown of what occurs if you default on federal student loans:
Immediately after a missed payment, your loan is considered delinquent, and you may incur late fees up to 6% of the payment amount.
If a payment is overdue by 90 days, loan servicers report the delinquency to major credit bureaus, potentially damaging your credit score.
After 270 days of non-payment, your loan enters default status.
What happens in default…the following repercussions occur:
The total loan amount, including interest, becomes due immediately, a process known as loan acceleration.
Credit bureaus are notified of the default, affecting your credit history.
Eligibility for deferment, forbearance, and income-driven repayment plans is lost.
You cannot receive additional federal financial aid.
The government has the authority to garnish your wages, tax refunds, and Social Security benefits to recover the debt.
Legal action may be pursued by your lender to claim the outstanding loan amount.
Federal Student Loan - On-Ramp Period
Until September 30, 2024, federal student loan borrowers who miss payments will not face the usual penalties. (This is only for federal loans that were on hold.)
In this interim period, loans will not default, delinquencies will not be reported to credit bureaus, and loans will not go to collections. However, payments are still due, and accruing interest will increase your balance—so this period should not be used as a reason to avoid paying your student loans.
Private Student Loans
Private student loans, being owned by private entities, have different regulations regarding repayment. While they may lack the enforcement capabilities of federal lenders, the repercussions of non-payment are still very real and significant.
The repercussions of failing to repay private loans can vary depending on the lender. Typically, the following sequence of events occurs:
Private student loans are considered delinquent the moment a payment is missed.
Once a loan becomes delinquent, the borrower is usually charged a late fee, which could be a flat rate or a percentage of the monthly payment due.
If the delinquency continues for 30 days, the lender has the right to report it to credit bureaus.
Should the delinquency extend to 90 days, or three months, the private student loans are then classified as defaulted, a status that is reached significantly quicker than with federal loans.
Once your private student loan is in default, here’s what can happen:
When your loans are transferred to a collections agency, be aware that debt collectors may employ aggressive tactics.
Your credit score, as well as that of any cosigner, will suffer if you fail to meet financial obligations. Although credit scores may not always reflect one's financial health, it is certainly not advisable to neglect them.
You may be subject to legal action. Your lender has the right to sue you for the outstanding debt.
Your wages can be subject to garnishment, but this occurs only if your lender files a lawsuit against you and obtains a court order. However, they cannot garnish your tax refunds or Social Security benefits.
Can you declare Bankruptcy on Student Loans?
Discharging student loans through bankruptcy is a challenging and often impractical process. Generally, student loans are not eliminated by declaring bankruptcy, particularly federal loans, as the government ensures the recovery of these funds. However, there is a slim possibility for student loans to be discharged via an “adversary proceeding” within the bankruptcy process. This requires the debtor to demonstrate that repaying the student loan would result in an inability to maintain a basic standard of living. Despite this option, the success rate is exceedingly low; only about 0.1% of individuals who pursue this route achieve a discharge of their student loans. Furthermore, the bankruptcy process is arduous and should be approached with caution. Recent developments have introduced a new process to facilitate the discharge of student loans in bankruptcy. This process involves completing an Attestation Form, which aims to simplify proceedings and increase the likelihood of a successful discharge by providing a more objective framework for evaluating undue hardship.
Can you be taken to Court?
Rest easy knowing that jail time is not a consequence of defaulting on student loans. However, it's important to be aware of the other significant repercussions that can arise. If you're struggling to make payments, it's crucial to explore options such as deferment, forbearance, or repayment plans that could help manage your student loan debt more effectively.
It's important to note that defaulting on student loans can lead to a civil lawsuit, not a criminal one. So, while jail time is not a concern, the prospect of navigating a prolonged legal battle, complete with attorney fees and court costs, is a significant deterrent. To avoid such complications, it's crucial to take proactive steps to prevent loan default.
Proactive steps to take if you can’t pay your Student Loan…
If you're finding it difficult to make your student loan payments, consider the following steps:
Contact Your Loan Servicer
Anticipating a missed payment on your student loan? It's crucial to proactively reach out to your loan servicer. They are likely to suggest transitioning to an alternative payment arrangement, often an income-driven repayment plan such as the SAVE plan, which is designed to lower your monthly payments to a more affordable level. However, it's important to remain focused on eliminating your student loans swiftly, despite the potential for reduced payments.
During times of financial hardship, such as job loss or medical emergencies, loan servicers may suggest options like deferment or forbearance. These measures can provide temporary relief by suspending loan payments. However, it's important to note that interest often continues to accrue during these periods, effectively delaying but not eliminating the debt. Consequently, deferment or forbearance should be considered only as a final option. It is advisable to pursue these avenues solely when essential living costs, including food, shelter, utilities, and transportation, cannot be met.
Get on a Budget
If you can't afford student loan payments, create a budget to take control of your money. Seeing your expenses helps you find extra cash for loans and debts, benefiting you monthly. Make your free budget today with EveryDollar.
Lower Your Expenses
After setting your budget, cut spending. Reduce dining out expenses. Evaluate subscriptions and memberships. Limit luxuries to prioritize student loan payments. These actions help you meet financial obligations and avoid late payments.
Increase Your Income
Cutting costs is a common way to handle money better. If that's not enough, think about increasing how much you make. You can do this in a few ways: ask for more work hours at your job, find new clients if you work for yourself, or start a side job for extra cash.
CHECK IT OUT!!! Ramsey Solutions - Guide to getting rid of Student Loans… Guide to Getting Rid of Your Student Loans