If you're one of the many millions of graduates saddled with debt, it's understandable that you have some anxiety about paying off your loans. You may even start to wonder what happens if you don't pay student loans at all?
You're certainly not alone.
According to the U.S. News's annual survey, college graduates from the class of 2020 who took out student loans borrowed $37,584 on average. Not a small sum to pay off, especially for many grads entering the job market with low paying entry-level positions.
This article will cover what happens when you stop paying your student loans, and why you should never go into default on your loans. Then we'll provide tips on what to do when you're having trouble making payments, and also how to pay off student debt faster and cheaper!
What Happens If You Don't Pay Student Loans for 90 Days?
You are considered “delinquent,” and it will be reported to all 3 major credit bureaus. (The same thing happens when you don't pay your credit card for 90 days.) This can really ruin your credit.
Why do you need good credit? Well, to do adult stuff like rent an apartment, get a loan for a car, buy a house, have credit cards, or even get a contract with a cell phone service provider. When you have bad credit, you are considered a “risky borrower” and the only way you can borrow money is with sky high interest rates. Not a great situation to be in.
The good news is, you are not yet in “default,” and you can contact your lender to work out a plan to get back into good standing.
What Happens If You Don't Pay Student Loans for 270 Days?
After 270 days you are now in “default” and that's when it gets hairy. Your lender will put you in “collections,” which basically means that an agency will constantly call you and send you threatening letters to try to collect money.
While that may not sound too terrible, it will certainly get worse. Particularly if you have a federal loan. Once the federal government finally gets involved, they are not gonna mess around.
Here is a list of some of the actions the fed can take to punish you for defaulting on your student loans:
- Contact your employer and garnish part of your paycheck — up to 15%!
- Take your federal and state income tax refund
- Take away your social security retirement and disability payments — up to 15%
- Take away lottery winnings
- Deny you an FHA or VA mortgage
- Prevent you from renewing your professional license (such as required for a nurse, lawyer or teacher)
- Block the renewal of your driver's license (in some states)
Here is a list of some of the actions the a private lender can take to punish you for defaulting on your student loans:
- Sue you (you must show up for court or you could be arrested)
- Garnish your wages
- Seize your assets
What can I do if I'm having trouble keeping up with my student loan payments?
First and foremost, don't just start skipping payments. Contact your lender and let them know what's going on. They will try to work with you.
There are several federal programs created to help you. If you have a federal loan, you can choose one of 4 repayment plans that will adjust your payments based on your discretionary income. Learn more about each one here.
The best part about these 4 repayment plans is that after 20-25 years, any remaining loan balance is forgiven!
If you have a private loan, here are some repayment assistance programs to look into.
Is there a legal way to stop paying for a short period of time?
Yes! Here are 2 options:
A “forbearance” allows you to suspend your payment with fees and interest for a period of time (no longer than 12 months). This is a good option if you have a temporary financial hardship. Also, it will not affect your credit!
A “deferment” may be a better option for you if you have a significant financial hardship, such as unemployment. Deferment suspends your payments with zero or reduced interest. Usually you can get a longer period of time, often 3 years. Similar to forebearance, it will not affect your credit.
Additionally, there is one more option for you if your income is less than $13,000 per year. In this case you are close to the US poverty line. Therefore, your payments can be legally reduced to zero.
What are some tips for paying off student loan debt faster (and cheaper)?
1. Think strategically about how you'll pay off your student loan debt
It's a good idea to evaluate your student loan situation shortly after (or even before) graduation, so you don't make mistakes early on that you'll regret later. Many colleges and universities have student loan counselors and other experts on hand to help guide you through the initial process. But it's good to understand the basics and take steps to pay off your student debt in timely fashion.
2. Assess interest-rate opportunities
Today's historic-low interest rates offer recent and not-so-recent graduates the opportunity to lower the interest rates on their student loans. Federal subsidized loans currently carry a 2.75% interest rate, while un-subsidized loans carry rates of 4.3%. Other types of loans carry even higher rates. (Keep in mind that you can annually deduct up to $2,500 of student loan interest on your taxes, assuming you meet the income limitations.)
Moreover, if you own a home, also consider whether using home equity to pay off student loans makes sense, given today's low rates. A word of caution, however: You may want to keep your student loans as student loans, as you have them more flexibility to defer them if you ever get into a financial bind.
3. Compare repayment plans
Student lenders typically offer several different types of repayment plans. These vary from “10-year plans” in which you make fixed payments over a 10-year period, to “graduated” plans in which payments increase every two years (assuming that your income will be increasing as well).
If you consolidate your loans after graduation, you can stretch repayment for up to 30 years, though you'll pay a lot more in interest if you do so. If you are entering a career in public service, such as working for government or as a teacher, you will likely qualify for the Public Service Loan Forgiveness Program.
If your household income is rather low, you might also qualify for “income-based repayment,” which ties your payments to your income. Which repayment plan makes sense for you depends on your salary after graduation and other financial priorities.
It's great to pay off your student loans quickly, if it's possible, but keep in mind that it's lower-interest debt, especially if you qualify for the student loan interest tax deduction. Focus on paying off higher-interest credit cards and even stashing something away for retirement before putting more than necessary toward your student loans.
4. Consolidate multiple loans
You might look into consolidating your loans if you have several federal loans. You will be able to combine all of your loans to a fixed interest rate based on the average of the interest rates on the loans being consolidated. This might be a smart way to go if you have some loans with lower interest rates that will weigh the average in your favor.
5. Save wisely
With a little creativity, you can probably come up with some ways to save up extra money to put toward your student loans.
Consider setting up a separate savings account in which you stash extra money you get, whether it's a little from every paycheck, gift money or your federal tax deduction. Then use that money to pay extra on your student loans each month or year.
Even paying an extra $50 per month on a $50,000 loan with a 6.8% interest rate could save you about $2,300 in interest over a 10-year loan and shave a year off the repayment term, according to this Bankrate.com college finance calculator.
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6. Invest with care
You might be able to defer payments for a while, such as during the six-month loan grace period right after college. Consider using these times to sock away money in investment accounts, such as a taxable brokerage account. Then invest the money across a broad range of investments, such as domestic and international stocks and bonds.
By generating higher returns on these investments, you can use those earnings to pay down your student loans later on.
Furthermore, remember this: Ultimately student loan debt is lower-interest debt than most other types of debt. While you want to pay it off at a good pace, you might do better putting extra money into investment accounts, assuming you can earn higher returns than the interest rate you're paying on your student loans.
You always have options
When it comes to student loans, remember that you always have options. Lenders want you to make payments, so they will be willing to work with you, even when you go through a difficult financial period in life. Just make sure to reach out to them immediately if you think you are going to have trouble.
Now you understand what happens if you don't pay student loans, and hopefully you can avoid it. More than anything, you want to protect your credit and stay out of default. Then, you can strategize how to pay off loans faster and cheaper.