If you never pay your student loans, your credit score will drop, you will have a harder time getting future loans, and you can even get sued by your lenders. The short and long term consequences of not paying your student loan can be painful. Hence, it is important to pay your student loan on time or get help if you are in financial trouble. Here’s What You Should Know as You Approach Student Loan Failure.
Take away key
Failure to pay student loans can lead to late fees, damaged creditworthiness, wage garnishments, and more. Talk to your lender about repayment alternatives if you’re struggling to keep up.
What if you fail to pay the student loan?
Whether it’s your student loan payments or other debts, if you fail to make your monthly payments, your finances can be hit from multiple angles. Here’s what can happen if you never pay your student loans.
The short term consequences
If you are even one day late with your student loan, you are immediately deemed to be in default. If you miss some payments, you could:
- Late fees. A late payment – one that you eventually make but not on the due date – can result in a late payment fee. This amount will vary by lender and not all will charge this fee, but it is very common to see either flat late payment fees or fees that represent a percentage of your missed payment.
- Withheld tax refund. If you default on federal student loans, the government may withhold your refund until you are aware of payments.
- Garnishment of wages. If you are a few months behind on your student loans, your lender can take steps to seize your wages – sometimes up to 25 percent of your disposable income. It can do this until you have paid back some of your loans and are in good shape.
The long-term consequences
Loans are considered overdue immediately after a missed payment, but your lender or credit service provider may not report you to major credit bureaus until you are 90 days past due. The longer you are not paying your student loans, the following can happen:
- Default. After several months of missed payments, your loan will default. The exact timing and consequences of a default vary depending on the lender. In extreme cases, the entire student loan amount is due immediately.
- Eligibility for future aid is lost. If you are currently in default, you could lose future college grants, including scholarships, grants, and federal student loans. Bad credit on your credit report can also make it difficult to buy a home, buy a car, or withdraw a credit card.
- Credit score goes down. The longer you don’t pay your student loans, the more your credit score can go down.
- Possible lawsuits. Your original lender could sell your loan to a debt collection agency who can call you and send you letters to collect a claim. To seize wages, lenders must go to court. You could be sued if you fail to pay back your loans.
Loss of student loan after 7 years?
While negative information about your student loans can disappear from your credit reports after seven years, the student loans themselves stay on your credit reports – and in your life – until you pay them off. On very rare occasions, bankruptcy may allow you to get rid of your student loans, but generally the only way to make your loans go away is to complete the repayment.
How to Get Rid of Student Loans
If you are struggling to repay your student loans, there are several repayment plans that can help you keep your loans current without breaking the bank. Consider all of your options before choosing the best plan for your needs.
Income-oriented repayment plan
If you can’t afford to pay back your student loans, you can put all of your federal loans into an income-oriented repayment plan. There are a few different repayment options available to suit your needs, but they all have similar methods.
With each plan, you make monthly payments based on your disposable income and family size. After 20 or 25 years, depending on your plan, the balance of your loans will be waived. You need to update your information every year so that your payments accurately reflect your financial situation.
Public Service Lending (PSLF)
Public service lending is available to federal student loan borrowers seeking careers in public service. After 10 years of making payments under an income-based amortization plan and working for a suitable employer, your remaining debt will be waived.
The Biden government recently announced major changes to its public service loan program. The pending changes are designed to make it easier for borrowers to qualify for this state student loan agreement.
Debt snowball or avalanche of debt
If you have a mix of government and private student loans, or many different loans, consider a different approach. Debt reduction plans, like the debt snowball or the debt avalanche, can help you reduce your student loan debt faster.
Either way, you start by listing all of your debts, including the total amount you owe, your monthly payment, the interest rate, and the due date. Next, make minimum payments on all of your loans.
This is where the strategy begins to differ.
- The snowball method, apply every free dollar you have to the lowest balance debt.
- With the debt avalanche method, bet every free dollar on the debt with the highest interest rate.
Repeat your chosen action until you have paid the first debt on your list. Then move on to the next smallest debt (or the one with the next highest interest rate) and repeat the process until all of your student loans are paid in full.
If you have high interest rates or a variety of student loans, you should consider refinancing. Refinancing is the process of taking out a new loan to pay off all of your current student loans. You will receive new repayment terms and a new interest rate, and then make a monthly payment on your refinanced loan until it is repaid in full.
Note that you can only refinance your loans with private lenders, so be careful. Federal loan refinancing means you will lose certain benefits such as: B. Forbearance or the option to sign up for an income-based repayment plan. However, if you have good credit and are getting a lower interest rate than you are paying now, refinancing can make sense in certain situations.
Processing of the student loan
Student loan settlement occurs when you pay off your student loans for less than you owe. If you are well behind on your student loans and your creditworthiness has already suffered, this option may benefit you.
Remember that you need a lump sum to pay the outstanding settled balance and there is no obligation on lenders to pay each other. However, some lenders are willing to consider settling for less if it helps them collect a significant portion of your unpaid debt.
Can you redeem student loans in the event of bankruptcy?
The US bankruptcy law allows student loans to be paid out if borrowers can demonstrate that this is “undue hardship”. Evidence of undue hardship, however, has proven difficult. Borrowers must meet three guidelines of undue hardship known as the Brunner test:
- You can prove that in the event of a compulsory repayment you will not be able to maintain a minimum standard of living.
- They demonstrate that the hardship will linger for much of your repayment term.
- You tried to repay the loan in good faith before filing for bankruptcy.
It is technically possible to redeem student loans in bankruptcy, and attempts are currently being made in the House and Senate to facilitate government and private student loan processing. However, you should be aware that it will be an uphill battle to prove that paying back your student loan is an undue hardship for you.
Are student loans granted?
President Biden mentioned the possibility of student loan waivers during his campaign. But so far his government has focused on revising existing forgiveness programs and not introducing one-off forgiveness for everyone. Hence, it is important to keep making payments on your loans.
Even if some form of forgiveness arrives, don’t wait for it; Paying your loans ensures that you do not default on payments in the meantime. And remember, federal student loan borrowers won’t have to make payments until May 1, 2022. So you have some air to breathe if you are currently having problems.
The bottom line
Failure to pay back your student loans can have disastrous consequences for your finances, creditworthiness, and future credit prospects.
If you’re struggling, find an amortization plan that’s right for you, such as: B. an income-oriented repayment plan, or refinance your loans. If you fail to repay your student loans, you will be hurt for years to come, so the best course of action should be the one that gets you back on track.