Failing to pay student loans can lead to serious financial consequences, including late fees, credit score damage, wage garnishment, etc. Here’s a comprehensive look at what can happen if you fall behind on your student loan payments and strategies to avoid these pitfalls.
Key Takeaways
- Missing student loan payments can result in late fees, damage to your credit score, and even wage garnishment.
- The longer you delay payments, the more severe the consequences become.
- Federal student loans go into default after 270 days of missed payments, while private loans typically default sooner.
Consequences of Not Paying Student Loans
Late Fees
If you’re more than 30 days late on a federal student loan payment, you could be charged a late fee of up to 6% of the overdue amount. The fees and timeline can vary for private loans, but they also charge for late payments.
Credit Score Damage
Lenders report missed payments to credit bureaus, which can significantly lower your credit score. A lower score makes borrowing money in the future is harder and more expensive. For federal loans, reporting usually starts at 90 days late; for private loans, it can be as soon as 30 days.
Loss of Plan Flexibility
Defaulting on federal loans means the entire balance becomes due immediately, and you lose the option to choose or change your repayment plan. Starting in July 2024, borrowers who haven’t paid in 75 days may be automatically moved to the SAVE income-driven repayment plan.
More Severe Consequences of Defaulting
Loss of Loan Benefits
Once in default, you can no longer apply for deferment or forbearance. You also lose eligibility for future federal student aid.
Wage Garnishment
For federal loans, up to 15% of your disposable pay can be garnished without court intervention. Private lenders may take legal action to garnish wages.
Treasury Offset
Your tax refunds and federal benefits can be withheld to repay defaulted federal loans.
Legal Action
Private lenders may sue to recover the debt, potentially leading to wage garnishment or asset seizure.
Collections Agency Involvement
Defaulted loans may be sold to collection agencies, which can add hefty fees to your balance and persistently contact you for payment.
Loss of Professional Licenses
In some states, defaulting on student loans can result in the suspension or revocation of professional licenses, making it harder to work in certain fields.
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How to Get Student Loans Out of Default
Loan Rehabilitation
You can set up a loan rehabilitation program for federal loans by making 9 agreed-upon payments over 10 months. Successful completion removes the default status from your credit report and stops wage garnishment.
Loan Consolidation
Consolidating defaulted federal loans into a new Direct Consolidation Loan can quickly remove the default status, although it won’t erase the default record from your credit report.
Long-Term Solutions
Income-Driven Repayment Plan Forgiveness
Enroll in an income-driven repayment plan to potentially have your remaining balance forgiven after a set number of qualifying payments.
Public Service Loan Forgiveness (PSLF)
Work in public service and make 120 qualifying payments to have your remaining federal loan balance forgiven potentially.
Employer Assistance
Some employers offer student debt assistance benefits.
Disability and Closed Institution Forgiveness
Loans can be discharged in cases of permanent disability or if your school closed while you were enrolled.
Death
Federal student loans are discharged upon the borrower’s death.
What to Do If You Can’t Afford Your Payments
If you’re struggling to keep up with payments, explore options like changing your repayment plan, consolidating federal loans, refinancing private loans, or applying for deferment or forbearance. These steps can make your monthly payments more manageable and help you avoid severe financial consequences.
This content represents the views of Friends Wealth Management and is intended for informational purposes only.
For the past 25 years, John has worked as a Financial Advisor & Keynote speaker for many of Wall Street’s most reputable and respected firms, while specializing in advising high net-worth financial advisors and their clients on stock market trends, investment vehicles.
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