What Happens If You Don't Pay Student Loans?

Also, how to avoid bad credit and missed payments

Photo courtesy of Pexels.

Making student loan payments alongside your other bills can be a challenging feat. Being able to recognize how these financial burdens affect our day to day lives can be difficult. More than 1 million Americans are forced to go into “default” payment for their student loans each year. 

Going default means that they have a failure to repay a loan according to the terms agreed to when you took out the loan. People will default if they have not paid in more than 270 days. However, there are dire consequences for your financial stability and credit if you end up having to take this route. 

Today, the national cumulative student loan debt amounts to $1.7 trillion, with that number climbing steadily each year. The average borrower owes $37,000 total for their undergraduate degree. 35 million of these borrowers qualified for general student debt relief under the CARES Act of 2020, which paused student loan repayment during the pandemic until Jan. 31, 2022. Recent graduates and long-term borrowers have until then before interest continues to accumulate, and loan payment continues. Ways that people are preparing for repayment to resume are by financing with the Department of Education’s loan simulator. This tool gives you tips based on your current loan status on how you can lower your student loan payment, how you can pay off your loans faster, and helps you make decisions on whether you should consolidate your student loans. 

If you’re struggling to prepare for student loan repayment and are curious what will happen when you can’t pay up, continue reading. 

It can be difficult for people to save their spare change. 69% of adult Americans have less than $1,000 in a savings account. Of those with less than $1,000 in savings, most have no savings at all. Photo courtesy of Pexels

How Student Loan Repayment Works

Student loan servicers handle all billing and repayment plans. When in doubt of your options, it's best to contact them directly to get the info on your particular situation. For federal loans, you typically make your repayments through Nelnet or Great Lakes. They accept payments on a rolling basis, meaning that you can pay more than your minimum rate at a time. To never miss a repayment, you can enroll in automatic payments that will deduct it directly from your checking account. When you contact your servicer, they help you set up a repayment plan and will be able to guide you on how to navigate any confusion with repayment or additional fees. 

There are multiple repayment plans for federal student loans, but the most popular are the Standard Repayment Plan and the Graduated Repayment Plan. The Standard Repayment Plan is eligible for all borrowers, and payments are fixed with loans paid off over a ten year period. It’s good for borrowers who want to repay their loans over the shortest period of time to minimize interest charges. The Graduated Repayment Plan is also eligible to all borrowers. The difference, though, is that your repayments start off lower, then increase gradually, with loans paid in full over a similar 10-year period. This is a good plan for borrowers who expect their income to increase over time and want to pay off their loans as quickly as possible, without increased interest. 

Before college graduates get their diploma, they go through a mandatory exit loan counseling session, in which they’re told about their options for federal student loan repayment plans. The Department of Education’s website also has resources that are available to help people navigate their repayment options. 

The stress of paying your loans back can sometimes get to you. The DOE says that 10.7% of student loan borrowers – 4.6 million people – are in default, meaning they failed to make a payment in more than nine months. If you never pay your student loans, your credit score will drop, you'll have a harder time taking out future credit and you may even be sued by your lenders. Photo courtesy of Pexels.

What Happens If You Don’t Pay Student Loans? 

Sometimes, repayment just can’t happen under your current financial circumstances. Unfortunately, people who can't pay back soon still have the burden of student loan repayment, and when you miss a payment, the financial consequences can be severe. 

Literacy on finances isn't often taught in schools. Most graduates have to take a special course outside of their university’s classrooms to learn more about balancing their personal financial issues. At the end of the day all student loans must be repaid in full. If someone misses a payment On the first day your loan is targeted as past due or delinquent. This happens even if you don't pay by accident. It's really important to keep track of your status, especially regarding student loans. If 90 days go by and you haven't paid yet, your student loan servicer will contact the three major credit unions and it will affect your credit score negatively. 

Student loans work in the same way that any other loan would work for repayment, and affect your credit score similarly. If you pay them back on time and in the manner in which is agreed initially, then you will be okay. When you miss a payment, the lender can report this to credit bureaus and ultimately, it’s what can negatively follow you for years to come. When your credit score begins to suffer due to these consequences, it can affect your day-to-day life in unforeseeable ways. For instance you can't invest in real estate, including even getting your own apartment under your name. You can't rent a car, or take out any additional loans. Anything that you do that requires finances will be affected in some way when you don’t pay your loans. 

When your student loans continue to be unpaid, they will eventually go into default mode. This is what you want to avoid at all costs, if possible. When you go into default, it impacts your ability to borrow loans in general, but also affects your finances as well. Default causes the entire balance of your loan, plus interest, to become immediately due, without a payment plan option. This is therefore accelerating your loan payment and causes you to financially go into ruin. If things get really bad, it can cause you to lose some of your income directly by cutting your wages before they even hit your bank account. In most extreme cases, your loan carrier can even take you to court over the missed payments. 

If you’re interested in learning more about this, read our recent article on how student loans affect your credit score for more information. 

Doing some research on jobs with student loan forgiveness that might fit your current situation, or getting a financial advisor, can help offset some of the stress from student loans. Photo courtesy of Pexels.

So, What Should You Do? 

If you haven’t paid and you want to try to mitigate some of the damage that has already been done, here are some suggestions on how to fix things before it gets out of hand. First, contact your student loan servicer to figure out your personal situation. They might have some tips on how to navigate repayment, or might be able to work with you given your financial situation to change your payment schedule. Another option is to try and score a job that offers student loan forgiveness and can help offset the cost of your student loan bill. Many of these jobs have to be done in public service, or require people to pursue other jobs in public service related fields. Read our article “I Can’t Pay Student Loans, What Should I Do?” to learn more tips on how to navigate your student loan repayments.

Trying to even think about what happens if you don't pay your student loans can feel really intimidating, especially for people who recently graduated. Managing all of your bills and trying to make sure that your payments are on time can be very stressful. It's difficult to find a full-time job depending on the profession you are looking to go into, as well as based on your personal experience in the workplace. Even though most might think it is very difficult right outside of college, people struggle to pay the student loans for the rest of their lives, with interest accumulating over the years. It's a common phenomenon for this to happen.

Liz Anastasiadis
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