What (Actually) Happens If You Don’t Pay Student Loans

If you’ve ever taken out student loans, or any type of loans for that matter, you’ve probably wondered what would happen if you just stopped making payments. How long would it take before you faced any consequences? What exactly would those consequences be?

Anyone who’s actually missed payments or defaulted on a loan can tell you — it’s not good.

Thankfully, these situations can be avoided with a little forethought. Even if you’re struggling to afford payments, you likely have options that can buy you some time.

Here’s what you need to know about what happens when you skip payments or default on a student loan, and how to keep it from happening.

What happens if you skip a payment or default?

  1. Your credit score takes a dive

When it comes to your credit score, the most significant factor is an on-time payment history, which counts for 35% of your score. Missing one payment could result in an 180-point drop.

Defaulting on your student loans could cause a whopping 350-point drop. Most negative marks stay on your credit report for seven years before they fall off. 

Having a good credit score makes it easier to rent an apartment by yourself, get a car loan or buy a house someday.

  1. Could hurt your job outlook

Depending on the industry you work in, you may not be hired or promoted if you default on a loan. This mostly affects people who work in the military, law enforcement, or financial services.

  1. Makes it hard to qualify for more financial aid

Borrowers who default on federal loans cannot receive any more federal aid until their loans are in good standing. If you default on a student loan and later decide to go back for graduate school, you may be precluded from qualifying for federal financial aid.

Private lenders will also likely deny you because of a default, unless you have a cosigner with a high credit score.

  1. Could get sued in court

If you default on federal loans, the government can garnish your wages and seize your tax return until the debt is repaid. The amount they garnish may be more than your previous monthly payment, thereby making it harder to afford your other bills and expenses. Private lenders may also sue you for the ability to garnish your wages.

What to do instead of skipping a payment

Apply for income-driven repayment 

If you can’t afford payments under the standard plan, you can pay less by switching to one of the four income-driven repayment (IDR) plans. Each IDR plan includes loan forgiveness after 20 or 25 years, depending on the plan rules. You’ll have to pay income tax on the forgiven amount.

These plans use your income, family size, and marital status to determine your monthly payment. Unemployed borrowers may have a $0 monthly payment, which will still count toward the 20 or 25 years needed for forgiveness.

Switch to extended or graduated repayment

Depending on your student loan balance, income, and family size, you may pay less every month with a graduated or extended repayment plan instead of an IDR plan.

A graduated plan has a 10-year term for most federal loans, like the standard repayment plan, but payments start low and escalate every two years. 

The extended plan will stretch payments over 25 years. You can choose from a fixed extended plan with the same monthly payment for the entire term or a graduated extended plan where the payments scale up over those 25 years. 

Neither of these plans comes with loan forgiveness, so you may want to wait until you truly can’t afford payments on an IDR plan before switching. Use the official loan simulator to see which repayment plan works best for you. You can switch between plans easily.

Defer your loans

The federal government offers deferment and forbearance programs for struggling borrowers. The main difference between the two is that interest may not accrue during deferment if you have subsidized loans. The federal deferment program has specific requirements, so apply for forbearance instead if you don’t qualify.

Most private lenders offer a forbearance program for qualified borrowers. To be eligible, you usually need to be a borrower in good standing who has already made a certain amount of on-time payments, usually six months’ worth.

Both federal and private loan forbearance programs charge interest during the deferred period. Any unpaid interest will be capitalized.

Ask to skip a payment

Some private lenders let you skip a payment without applying for the official forbearance program. You may have to pay a small fee in exchange, usually $25. This allows for a short break on payments without the cost of capitalizing unpaid interest. 

Refinance to a longer term

If you’re still employed but worried about future layoffs or looming expenses, refinancing your private loans to a longer term could reduce your monthly payment and ease your money worries. 

When you refinance, you can select a longer payment than what you currently have, like choosing a 20-year term if you only have 10 years left. This may result in paying more interest overall, but can be a necessary tradeoff to prevent default. 

Experts generally recommend against refinancing federal student loans, because you’ll lose out on IDR plans, loan forgiveness, higher forbearance limits, and all the other benefits associated with federal loans.

Contact the lender

When you’re struggling to make payments, leaving your lender in the dark is a bad idea. Most lenders are more willing to work with borrowers who reach out before missing any payments.

If you suddenly lose your job or have a surprise medical emergency, contact the lender to ask about your options.

What to do after default

Although it may be tempting to ignore your debt, the problem won’t go away unless you do something about it. Here are the right steps to take if you’ve already defaulted on your student loans:

Federal loans: consolidation or rehabilitation to repair

If you’ve only recently defaulted on federal loans, there’s still time to undo the damage with two different methods: consolidation and rehabilitation.

Of the two strategies, consolidation is the faster route. If you choose consolidation, you either have to make three on-time monthly payments with an agreed-upon amount or consolidate your federal loans immediately and switch to an income-driven repayment plan.

If you’ve already consolidated all your eligible loans, you won’t qualify for this method. In that case, you’ll have to use the rehabilitation method. 

Under rehabilitation, borrowers have to make nine on-time monthly payments. Each payment will be 15% of your monthly discretionary income. After completing the nine payments, your loans will be restored to normal status.

Neither of these strategies will erase the late payments on your credit report, but they will remove the default mark.

Private loans: work with your lender

If your private loans are in default, you should contact the lender and ask about your options. You may be able to settle the amount and remove the default from your credit report. It will show that you settled the account, which is better than a default.

No cosigner student loans from Funding U

At Funding U, we make no cosigner student loans directly to college students. We don’t look at your parents’ credit; we look at you, your academic progress, and your financial plan. Apply online.Check out our latest blog posts for tips and useful info about managing money in college, navigating the job market, and more.

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