What Happens When You Don’t Pay Your Student Loans?
This is how it starts: emails, calls, snail mail, calls to your emergency contact. All of them can be a nuisance but still ignored, but once the federal government begins garnering your wages (e.g. taking money from your paycheck directly), you’ll definitely start listening!
It can be uncomfortable, you have to sign into multiple accounts, there are long waiting times by phone to talk to surly operators, directions can be unclear online, but it’s important to know where you stand and what your options are
When you start having hardship with paying off your loans, you should consider consolidation, deferment and forbearance.
When things get really bad, you’ll have to deal with:
- Delinquency and defaulting on your loan
- Negative credit score impact
- Wages taken directly out of your check
- Seizure of your tax refund
After 90 days of not paying your loan, it will get reported to the three main American credit bureaus. This will make it harder to rent somewhere to live, purchase a car, and increase interest rates for you, while also dragging your credit score down which could take years to untangle and bring your score to its previous level.
If you are having trouble repaying, there are options for you to work with your servicer so as to avoid default
Deferment vs Forbearance
Student loan deferment is a way that borrowers can temporarily pause or sometimes even lower the payments they make monthly, and there are a fair number of instances where the borrower does not have to pay the interest that accrues. Forbearance is also when you pause or lower payments, there are even some instances when it is mandatory that your servicer provides you forbearance. However, the main difference is that in every case of forbearance, the borrower is responsible for the interest that accrues between payments.
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Delinquent vs. Default
Your loan is delinquent as soon as you miss a payment, after 90 days, your credit score is negatively impacted. You may pay a small fee, and receive a number of emails and notifications on your loan servicing portal, but there is not an overwhelming amount of outreach to you.
After 270 days of not paying, not consolidating, creating a repayment plan, or utilizing deferment or forbearance, your loan is in default. This gets very negative, very quickly:
- Wages are taken directly out of your paycheck (this is probably the worst that could happen, they have the right to garner 15% of your paycheck.)
- Debt collectors start calling you incessantly
- Interest plus fees up to 25% can be tacked on
- Your tax refund can be taken away
- You lose your ability to apply for new federal aid
- You are unable to pause or continue delaying payment
- You are responsible to pay the loan in full, immediately
Moving out of the country does not excuse your debt, declaring bankruptcy won’t erase it, and the hit to your credit will inhibit your ability to rent an apartment, purchase a car, even get a cell phone plan will be severely hampered if you allow your loans to default.
We recommend being in communication with your loan servicer, between payments, online and by phone, which will make planning ahead easier if you foresee you may have trouble paying on time in the near future.
If you are feeling like you are already pretty behind on payments, here are some things you can do to get back on track:
- Talk to the loan servicer or the Department of Education and negotiate payment terms. Yes, you can call them!
- Create a budget. We have a simple template you can use here: https://docs.google.com/spreadsheets/d/1Sg4nIZa56fuzknqh2-OQ6XcGvzXkywzvTid7Izv9PS4/edit#gid=0
- Set up automatic payments.
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