Are you overwhelmed by your student loans and afraid of falling behind? It’s a major issue many college graduates face. As of early 2020 — before loan payments were suspended due to the pandemic — approximately 5.8 million federal loan borrowers were in default, meaning they were 270 days or more behind on their payments. Unless your student loans are in deferment or forbearance, missing your payments is a big deal. Depending on the type of loans you have, lenders can send your information to collections, and federal loan servicers can garnish your wages and even take your tax refund.
What Happens If I Don’t Repay My Student Loans?
The Federal Reserve reported that 17% of student loan borrowers were behind on their payments in 2019, the last available data. If you can’t afford your payments or are in danger of missing one, you could enter default. When a lender considers you in default and what effects it has on you is dependent on the type of loans you have.
Consequences for Not Repaying Federal Loans
[Note: Under the CARES Act, federal loan payments are suspended through January 31, 2022, and borrowers should prepare for resuming student loan payments at that time. If you’re already in default, the CARES Act also temporarily suspended collections activity.] Under normal circumstances — meaning when the CARES Act isn’t in effect — your loans become delinquent the first day you miss a payment. If you don’t make your payment for 90 days, your lender will send the late payment notice to the credit bureaus. Late payments can damage your credit and lower your credit score. If you don’t make your payment for 270 days, your loans are entered into default. With federal loans, lenders can take multiple measures against you:
- Your balance is due: Once in default, the lender will accelerate your loans, and the full remaining balance will become immediately due.
- You lose eligibility for federal loan programs: If you default on your loans, you’ll no longer be eligible for federal programs like forbearance or deferment.
- Your lender can send your account to collections: If your account is sent to collections, you will start receiving calls and emails from debt collectors.
- The lender can garnish your wages: If you don’t make your payments, the lender can garnish your wages, deducting money directly from your paycheck.
- The lender can take your tax refund: If you’re entitled to a tax refund when you file your tax return, the lender can seize your refund through a process known as treasury offset.
- The lender could take you to court: Your loan servicer can sue you in court and you can be charged attorney fees, court costs, and collection fees.
- The default is reported to the credit bureaus: The lender will report your account status to the credit bureaus. With a default on your credit report, it can be difficult to qualify for other forms of credit, such as home or auto loans.
Consequences for Not Repaying Private Loans
Default works differently with private student loans. When your accounts enter default can vary by lender, but generally occurs when you miss three payments or are 120 days late. Private lenders can’t take your tax refund or garnish your wages, but they can take other steps against you:
- The lender can send your information to collections: Private lenders will work with collection agencies to attempt to get you to pay what you owe. You could face continual phone calls and emails from agencies.
- The lender will report your status to the credit bureaus: Your default will be sent to the credit bureaus, impacting your credit.
- They can take you to court: Private student loan lenders can sue you in court for the outstanding balance of your loan. You could be on the hook for court fees, attorney fees, and other related expenses.
Other Ways Student Loan Default Can Hurt You
Besides actions the lender can take against you, there may be other ways that defaulting on your loans can impact your life:
- Military members and federal employees may lose their security clearance: If you are in the military, are a federal employee, or have a government job, defaulting on your federal or private student loans could affect your job. Missing payments could cause you to lose your security clearance, or you could be unable to pass a background check.
- You could lose your professional license: In some states, certain professionals, such as nurses, can lose their licenses if they default on their student loans. Without a license, you’ll lose your income.
- It can be difficult to get a job: Some employers perform credit checks as part of their hiring process. If you defaulted on your loans, that can be a red flag and cause some employers to reject you for a position.
Will My Student Loans Ever Go Away?
Unless you’re enrolled in a Public Service Loan Forgiveness (PSLF) program or are eligible for a student loan discharge, there’s no easy way to get rid of your student loans. Removing student loans from your credit report can also be challenging.
Student Loan Statutes of Limitations
While private student loans do have statutes of limitations, they’re often years long, and there’s no guarantee that a lender won’t sue for payment before the term is up. Federal student loans do not have a statute of limitations. In either case, you should not rely on a statute of limitations to alleviate your debt.
Will Student Loans Be Forgiven?
Over the last several months, borrowers have watched the White House as the Biden administration has looked into forgiving $10,000 in federal student debt.
Federal Student Loan Debt Relief
There are several student loan forgiveness and discharge options to explore if you’re looking for federal student loan relief, including but not limited to:
- Income-Driven Repayment (IDR) plans
- Public Service Loan Forgiveness (PSLF)
- Occupational student loan forgiveness (like military student loan forgiveness)
Relief for Private Student Loans
If you’re having trouble paying your private student loans, contact your lender for help. They can provide information about the options that may be available to you. You may also consider refinancing your student loans if you’re looking to lower your monthly payment or save money over the life of the loan.
What to Do If Your Student Loans Go Into Default
If you’ve already defaulted on your loans, it’s easy to feel overwhelmed or hopeless. But there are different things you can do to get out of default and reorganize your finances:
1. Federal Loan Rehabilitation
Federal loan borrowers may be eligible for default rehabilitation. Through this program, you sign a written agreement and commit to making nine monthly payments within 10 months. The lender determines a new payment for you based on your discretionary income. Once the payments are completed, your loans are no longer in default, and the default will be removed from your credit report.
2. Federal Loan Consolidation
With federal loan consolidation, you apply for a Direct Consolidation Loan for the amount of your existing debt. Under the Direct Consolidation Loan, you’ll have a new repayment term and can enroll in an income-driven repayment plan to reduce your monthly payments. Once the consolidation is complete, your loans are no longer in default. However, the record of the default is not removed from your credit report.
3. Private Loan Process
Private lenders don’t usually have formal default rehabilitation processes in place. However, you should contact your lender as soon as you are in default to discuss arrangements for getting your account back in good standing.
4. Student Loan Refinancing
If you have private student loans, another way to get out of default is to refinance your debt. While it can be difficult to refinance on your own after a default because of the impact it has on your credit, you may be eligible for a loan if you have a cosigner with excellent credit. If approved, the loan will pay off your existing debt, and you’ll no longer be in default.
How Refinancing Your Student Loans With ELFI Can Help
If you have private student loans and are in danger of default, consider student loan refinancing. When you refinance, you can qualify for a lower rate and adjust your repayment term, giving you a much more affordable monthly payment. With this approach, you can prevent default from happening and protect your credit. Find out how refinancing can affect your payments with the student loan refinancing calculator. You can also pre-qualify for student loan refinancing with ELFI with no impact to your credit to find out what rate you qualify for in minutes.
