As a college graduate, you may find that juggling all of your financial responsibilities is a challenge. Perhaps for the first time, you’re solely responsible for paying rent, making your car payments, paying off your student loans, or even caring for your partner or child.
With so many competing demands on your budget, it may be tempting to put off your student loan payments. But not paying student loans can have significant, long-term consequences.
What Happens if You Don’t Pay Student Loans?
When it comes to missing your student loan payments, the consequences will depend on the type of loan you have and how late your payment is. Below is what you can expect to happen if you miss your payments with federal student loans and private student loans.
What Happens if You Don’t Pay Your Federal Student Loans
- During your loan grace period: With undergraduate federal student loans, you don’t have to make payments while you’re in school or during the grace period. The grace period ends six months after you graduate or leave school. After that time, you will have to make monthly payments against the principal and interest
- If the payment is one day late: When you miss a payment by a day, your account is delinquent, and the loan servicer will send you reminders.
- If the payment is 30 days (about 1 month) late: If you don’t make the required payments for 30 days or more, the loan servicer may charge you a late fee. Federal loan late fees are 6% of the late payment amount.
- If the payment is 90 days (about 3 months) late: Once your payments are late by 90 days or more, the loan servicer can report the late payments to the three major credit bureaus: Experian, Equifax and TransUnion. This step can damage your credit.
- If the payment is 270 days (about 9 months) late: Finally, accounts that are 270 days late or more are entered into default. The loan servicer can take severe measures, including reporting the default to the credit bureaus, sending the account to a collections agency, garnishing your wages and even taking your tax refund.
If you borrowed Federal Unsubsidized Student Loans, you will accrue interest during your in-school period through your student loan grace period, unless you chose to make payments during that time.
For the Federal Perkins Loan Program, contact the school where you received the loan for details. If you know that your Perkins Loan has been assigned to the U.S. Department of Education, contact the ECSI Federal Perkins Loan Servicer. Servicers for Federal Perkins Loans can vary from other federal student loans.
Important: Since March 13, 2020, federal student loan payments have been frozen. Initially the payment freeze went into place due to the Coronavirus Aid, Recovery and Economic Security (CARES) Act, but the measure has been extended several times. We recommend that you go directly to Department of Education’s student aid website to find the most up-to-date and accurate information about the federal student loan payment pause.
What Happens if You Don’t Pay Your Private Student Loans
With private student loans, the consequences of not paying student loans can occur much faster:
- Immediately after graduation: Most private student loan companies offer in-school deferments and grace periods. Depending on the repayment terms of your loan agreement, you may have to make payments while you’re a student or immediately after graduating.
- If the payment is one day late: With private student loans, your account becomes delinquent once you are one day late, and the lender can charge you late fees.
- If the payment is 90 days (about 3 months) late: While it takes 270 days to default on a federal loan, you enter into private student loan default in as few as 90 days. The lender will report the default to the credit bureaus and take other measures to recoup its money.
- If the payment is 120 (about 4 months) days late: When your payments are 120 days late or more, the lender will typically send your account to collections, where they will reach out to collect the outstanding loan amount.
What Are the Consequences of Not Paying Student loans?
The consequences of not paying student loans can have a big impact on your financial well-being, so it’s important to stay on top of your payments or seek assistance when you need it. Federal student loan servicers and private lenders can take measures to try and collect the owed amount.
Below are 10 potential consequences you could face for defaulting on your student loan:
- 1. Damage to your credit score: When you default on your loans, the lender will report the default to the credit bureaus. Your payment history is the biggest factor determining your score, so a loan default can drop your score. For example, a payment that is 90 days late could cause your score to drop by as many as 150 points.
- 2. Long-lasting impact on your credit report: It can take a long time to recover from defaulting on your loans. Student loan defaults will remain on your credit report for seven years, making it difficult to qualify for credit cards, mortgages and other forms of credit.
- 3. Loan acceleration: Once your loan enters default, the lender can accelerate your loan. That means the total of the outstanding principal, interest and late fees become immediately due.
- 4. Wage garnishment: With federal student loans, your loan servicer can garnish your wages taking up to 15% of your paychecks once you enter default; the loan servicer doesn’t need to get a court order first. In the case of private loans, the lender has to sue you and get a court order before it can garnish your wages. The maximum percentage private lenders can garnish is 25% of your wages.
- 5. Treasury offset: Treasury offset is a measure only federal loan servicers can use. With treasury offset, federal loan servicers can withhold your federal tax refund, Social Security check or other government benefits to repay the amount owed.
- 6. Loss of eligibility for other aid: As long as your account is in default, you are ineligible for other forms of federal financial aid, including grants.
- 7. Inability to access transcripts: When you default on your loans, your college can refuse to issue you your official transcripts, making it difficult to transfer to another school or get proof of your education.
- 8. Debt collections: Both federal and private student loan companies can sell your account to collections agencies. Debt collectors can pursue collection aggressively, and you may be responsible for collection fees and other costs.
- 9. Loss of licenses: In some states, defaulting on your student loans can cause you to lose your professional license or even your driver’s license.
- 10. Lien on property: If a lender sues you and wins the lawsuit, they can place a lien on your property, such as your house. Although lenders will rarely force a sale of a home, they can wait and collect on the lien when you sell your home.
Tip: Under the CARES Act and the extended federal payment freeze, these measures have been paused for federal student loan borrowers. However, these measures are relatively common during normal repayment periods, so it’s important to make all of your payments on time and work with your lender if you have trouble affording your payments.
What to Do If You Can’t Afford Your Student Loan Payments
If you realize you cannot afford your payments – but haven’t entered into default yet – take these measures right away:
Contact Your Lender Right Away
Whether you have private or federal student loans, you can avoid a lot of problems by contacting your lender as soon as you realize you won’t be able to make your scheduled payment. By working with the lender early, you may be eligible for temporary payment deferments, alternative payment plans or other options that allow you to prevent defaulting on your debt.
Enter Forbearance or Deferment
With federal student loans, you may be eligible for a loan deferment or forbearance if you’re experiencing a financial emergency, such as getting laid off at work. With federal forbearance or deferment, you can postpone your payments for a period of time, giving you time to financially recover.
Some private student loan companies have their own financial hardship policies, so talk to your lender to see what options are available.
Enroll in an Alternative Payment Plan
If you have federal student loans, you may be eligible for an Income-Driven-Repayment (IDR) plan. With this option, your payments are based on a percentage of your discretionary income and a longer repayment term. Depending on your circumstances, you could qualify for a payment as low as $5.
As an added benefit, loans repaid under IDR plans can be discharged once the repayment term ends. If you still have a loan balance after 20 or 25 years the loan term varies by IDR plan the government will discharge the remainder, making you debt-free overnight.
Consider Refinancing Your Debt
If you have private student loans and aren’t eligible for a financial hardship deferment, another option is to refinance your debt. With student loan refinancing, you could potentially qualify for a lower rate or a longer loan term. Either option could give you a more affordable monthly payment. You will likely need good credit to qualify for a lower interest rate.
Important: Before refinancing federal student loans, carefully weigh the pros and cons. Refinancing federal loans converts them into private loans, and you’ll no longer be eligible for federal loan benefits like the federal payment freeze, IDR plans or loan forgiveness.
How to Get Out of Student Loan Default
Once your loans are in default, it can be difficult to get out. Depending on the type of loans you have, the following options can help you get out of student loan default:
Consolidate Your Federal Loans
If you have federal student loans, you can consolidate your defaulted loans with a federal Direct Consolidation Loan. To qualify, you must do one of the following:
- Agree to enter into an IDR plan
- Make three full, consecutive, and voluntary monthly payments before you consolidate
Loan consolidation doesn’t remove the record of the default from your credit history, but your accounts will no longer be in default, and you’ll regain eligibility for federal loan benefits and additional financial aid.
Direct Consolidation will also combine your existing federal loans into one, so it will be easier to manage your payments since you will only have one loan servicer and one payment due date to manage. And Direct Consolidation loans can have loan terms as long as 30 years. While a longer term means you’ll pay more overall due to interest, the longer loan term can give you a much lower monthly payment than you have now.
Negotiate With Your Lender
If you have private student loans, your loans are likely in collections, either with your lender or an agency working on their behalf.
When a collections agent attempts to collect on the outstanding loan, there is the potential for negotiation. You could enter into a payment plan, or, if you have access to a lump sum of cash, you could potentially negotiate a settlement where you pay a one time lump sum amount to settle the debt.
In some cases, it may be worth consulting a non-profit credit counseling agency or student loan attorney to discuss your options.
If you decide to meet with an attorney, you can find a lawyer specializing in student loans through the National Association of Consumer Advocates’ database.
Getting Back on Track With Your Student Loans
When money is tight, the risk of falling behind on your student loans can be frightening. But defaulting on your loans doesn’t mean you have to surrender your ability to manage them.
By talking with your lender as soon as the problem arises, there are plenty of ways you can get back on track with your student loans and keep working towards financial success. So don’t give up hope!
If you’re struggling to afford your payments, take action now to lower or postpone your payments so they’ll be easier to manage in the future, keep your loans out of default and make them easier for you to manage.