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Failing to pay your student loan is one of the worst financial moves you could ever make. And while you won't go to debtor's prison, you'll likely find yourself in emotional and financial prison.
I read an article yesterday about how 13% of student loan borrowers don't even consider their student loans as debt. Plus, there are entire forums on Reddit dedicated to intentional defaults on student loans. Crazy? Well, if that didn't surprise you, you probably won't be surprised that 13% of all student loans go unpaid. That means people aren't paying off their student loans.
That equates to 7 million student loans, each of which is delinquent by an average of $14,000.
So what happens if you don't pay back your student loans? Let's break down the process of what happens if I don't pay back my student loans.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend the Student Loan Planner, which will help you put together a solid financial plan for your student loan debt. Check out The student loan planner Here.
What happens if you stop repaying your student loan?
Your loan technically goes into “delinquency” if you don't make a payment on the loan for 270 days. For a typical loan, you have a billing date and then a 28-day grace period to pay – the actual due date. For example, if your billing date is 1/31, you have until 2/27 to pay your monthly payment in full. If you don't make your payment, your loan goes into “delinquency” status. This also happens if you don't make a full payment.
Once you fall behind on your loan repayments, your lender will try to contact you several times. Typically, you will receive a reminder at 30 days, 60 days, and 90 days late. You will also likely receive several calls from your lender to inquire about your intention to repay.
Even if you make partial payments, you will still be considered in default until your student loan account is repaid.
After 90 days of late payments, your lender will typically report the default to the credit bureaus and send you a final payment reminder. After 270 days of late payments, your loan is in default. On the 330th day, it is typically referred to one of the many student loan collection agencies or at least to the Department of Education's Default Management Resolution Group.
If you continue to fail to pay, your school, the financial institution that originated or owns your loan, your loan guarantor, and the federal government may take action to collect the money you owe on your student loan debt.
Consequences of late payment of your student loan
If you default on your student loan repayments, the consequences are not good. Aside from ruining your credit score, there are many ways your lender will try to collect the money.
If you are late with your payment, the following will happen:
- The entire loan amount and all accrued interest are immediately due and payable
- You will lose eligibility for certain programs, such as student loan forgiveness, deferment, deferral, and modification of repayment plans
- You lose the right to additional financial assistance
- Your loan will be reported to the credit bureaus as delinquent and your credit score will be affected (if you are already in default on your loan, you can check your credit score here).
- Your wages may be garnished to repay the debt (if you are a federal employee, you may be subject to wage garnishment of up to 15% of your wages due to the Federal Salary Offset).
- Your lender could take legal action against you
- Your lender could place a lien on your property
- Your tax return could be seized
- Your Social Security and other federal payments could be garnished
All of these factors can cause your student loan debt to cost you your job, your apartment, and more.
This TikTok is exaggerated (the time frame and the amount, but it really illustrates the problems with non-payment):
You can fix this
There are ways to get out of default without causing major damage. For example, you can rehabilitate your credit – this is a one-time program where you can make nine payments and have the default removed from your credit report.
While there will still be credit damage from non-payment, it is a big improvement and will help you get back on track.
Read this article on how to avoid defaulting on your student loan.
Better options if you can't pay
If you are having trouble paying back your student loans, you should contact your lender immediately. There are many options that could help you, and all of them are better than simply not paying back your student loans.
First, you should change your repayment plan to a more affordable plan. You could switch to IBR or PAYE, income-driven plans where your payment could drop to $0 if you qualify.
Second, if you are temporarily in difficulty, you can ask for a deferment or a moratorium on your loans. This will give you some time to get yourself back in order without having to make payments. Remember that interest will still accrue, but you will not have to make any payments.
Finally, see if you qualify for a student loan forgiveness program. If you don't qualify for a traditional student loan forgiveness program, you can switch to a repayment plan that includes student loan forgiveness.
With federal student loans, there's really no reason why you shouldn't be able to meet your payment obligations. If you can't pay back your student loans, there are ways to help you. Private loans are a little more difficult, but even then there are options.
A reminder of your student loan debt
It's important to remember that even if you don't pay back your student loan, the government or your lender will still get the money for your loan. This is because they can garnish your wages and taxes to make sure they get the money back.
According to the Department of Education's 2013 budget, after the government pays debt collectors to collect the loan, it will likely recover about 96% of the borrower's debt. Do you understand this? So even if you don't pay back your loan, AFTER the government pays a debt collector, it will still recover 96% of the debt. You can't escape your student loans, and not paying them off is not a solution.
Have you ever thought about getting rid of your student loans? What steps have you taken?
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