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Millions of Americans struggle with paying back their student loans. Some of them just can’t find a job when they graduate; some of them borrowed way too much money; some of them were fine making their payments until they were laid off or their car broke down or that tree in the backyard finally fell and wiped out a third of their home.
In any case, most student loan borrowers eventually face a month where they just can’t find the money to pay back their student loans. After all, when you need to decide between paying your rent and paying your student loan bills, paying rent seems like the obvious choice.
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But what actually happens if you just stop making your federal student loan payments—you don’t contact your servicer, you don’t place your loans in deferment or forbearance, you just stop?
What Happens If You Stop Paying Your Student Loans
It seems so easy to just stop making payments on your federal student loans. At first, you’re scared because you don’t know what’s going to happen. But after a couple of months, you realize that there’s little resistance from the government.
Maybe they’ve started to call you, but you can just ignore the calls; maybe they’ve sent you letters marked “Important” but you’ve stopped opening them. If they can’t get in touch with you then nothing can happen, right?
Wrong. The moment you miss your first student loan payment, a clock starts. And if you don’t stop that clock in time, then you will have to face major financial consequences.
Day 1: Interest continues to accrue.
Interest accrues on your student loan every single day. When you make a payment, you pay off the accrued interest and also a portion of the principal. By reducing the principal, you owe less in interest. Over the long term, this is how you pay off your student loan.
When you miss a payment, you don’t reduce the principal. This means that every single day you go without paying, you are gaining more and more interest, which makes your debt more expensive.
This isn’t such a big deal if you just miss one or two payments, or if you pay a little late, but in the long term, this can add a lot of extra money on top what you already owe. Once the interest capitalizes, you will wind up owing interest on top of your interest, which can quickly start to spiral out of control and can easily undo any progress you’ve already made on paying back your debt.
The status of your loan is also placed into “delinquency” the very first day you have missed a payment. If you do not make a payment within 90 days, all missed payments will be reported to the credit bureaus, harming your credit score.
Day 270: Your student loan defaults.
“Default” is a scary word when it comes to student loans. Once your student loan defaults, the government is going to step in to make sure that they get their money back, and they have a lot of tools at their disposal.
Technically, when your loan defaults, the entire balance of the loan becomes due immediately—talk about terrifying. If you can’t pay off the balance of your loan (and let’s be real, who can?) then your loan enters into collection via a third party. This ultimately means that you’ll be paying collection costs and fees on top of your student loan payments, and those fees can be upwards of 25 percent of your loan balance.
Beyond this, if you still refuse to make payments, the government is going to try its best to get its money back from you:
- Your tax refund may be intercepted by the federal government to cover your missed loan payments.
- Other government benefits may be intercepted. This includes things like social security, disability, and unemployment insurance.
- Your wages may be garnished. The government can collect up to 15 percent of your post-tax wages to cover your missed payments (and your employer will be fully aware of this).
- Your co-signers will also be in trouble. Whether your loan was co-signed by your parents, your grandmother, or just a really good friend, when you enter default they are at risk of the same retaliations that you are. This means that their wages, assets, and credit will all be at risk.
- Your default will be reported to the credit bureaus, damaging your credit for years to come.
- You will lose eligibility for additional student aid such as loans for grad school, and you’ll also lose certain privileges such as the ability to place your loans into deferment or forbearance. You may also forfeit the right to student loan forgiveness.
Beyond Day 270
If you still do not or cannot make any payments, the federal government will pursue you until they get their money—literally to your grave. There’s just no denying the fact that they’ll get what’s owed to them.
On the plus side, there is a pathway towards getting your loan payments back on track, called “rehabilitation.” Rehabilitation is a process in which your student loans will be taken out of default once you have successfully made a series of on-time monthly payments (usually nine payments). The payment amounts will be based on your income, and can be as little as $5 per month.
Rehabilitation carries with it the benefits of removing any notion of “default” from your credit report, which can dramatically boost your credit score and make it easier for you to be approved for things like credit cards and mortgages.
What About Private Student Loans?
Private student loans are a bit different when it comes to missing a payment. Depending on the loan contract, you might be in default after missing as little as a single payment or you might have a couple of months. But no private lender is going to give you as much time as the federal government does.
Once you are in default with a private lender, they will try to sue you for their money. Though they don’t have the power that the federal government has, if their suit against you is successful they can do anything allowed under state law to collect the debt from you (this will obviously vary by state). This can include things like:
- Your lender demanding immediate repayment
- Your lender seeking repayment from your co-signer(s)
- Referral to a collection agency, which may incur additional fees (possibly up to 40% of the loan balance)
- Placing a lien on your property (house, cars, land) and seizing assets like savings and investment accounts
And because most lenders report missed payments to the credit bureaus automatically, missing a single payment can have major consequences on your credit; each missed payment on top of that first will only drag it lower, making it more challenging in the future to secure a credit card, car loan, or mortgage.
Though the federal government may garnish your wages or your tax refund, they generally cannot seize other property or assets.
What You Should Do Instead
If you truly can’t afford to make your student loan payments, there are much smarter ways to go about it than simply ignoring your debt. Call up your servicer and discuss your options with them: You may be able to choose an income-based repayment plan or place your loans into deferment or forbearance for a few months until your finances are back on track. Each of these options has their own pros and cons, but all of them are better than simply allowing your loans to default.