With student loan payments set to resume soon, you may be wondering what happens if you can’t afford them.
After several years of frozen payments and interest rates, federal student loan installments have already resumed. This means you should begin checking your budget to ensure you have enough funds to cover the payment you haven’t been concerned about lately.
While there are consequences for failing to make student loan payments, federal student loans that are in default can be repaid. We’ll go over the following topics:
● The dangers of failing to repay student loans
● What costs and penalties can be expected?
● How to Restore Defaulted Federal Loans
What happens if you don’t pay student loans?
Missing student loan payments has financial consequences, just like any other debt. However, the penalty for late payments varies depending on whether you have a federal student loan or a private student loan.
Federal student loans
Missed federal student loans sometimes carry more severe consequences since they are related to the federal government. However, federal government-backed loans include some flexibility that private loans may not.
Borrowers with federal student loans have a bit of wiggle room before loan servicers take measures for being late, which begins with the late charge.
Federal student loan servicers will not charge you the customary 6% late fee until your payment is 30 days late. So, if you miss a $100 monthly federal loan payment by 30 days, you could be charged a $6 late fee.
Late payments will be reported to the credit bureaus
The student loan servicer may file your delinquent to the three major credit bureaus after 90 days: Experian, Equifax, and TransUnion.
This will result in a 90-day payment delay appearing on your credit record, which will have a detrimental impact on your credit score and your ability to get loans and credit cards for the next seven years.
Federal student loan default
Default is the final level of federal student loan delinquency. Default does not occur under the federal direct loan program or the Federal Family Education Loan (FFEL) program unless the student loan is at least 270 days late.
If you have federal Perkins loans, the loan holder may consider you in default if you do not make your payment by the due date – even if you are only one day late.
While defaulting on federal student loans has significant repercussions, it is resolvable. Contact your loan servicer right now to find out what options are available to bring them current. Services can often put you on a temporary repayment plan, and if you stick to it, your loans will be reinstated.
If you allow the loan to remain in default, the consequences can include:
● Exclusion from future federal student loans and other federal student aid
● The loan balance, including interest, could become owing immediately.
● Exclusion from forbearance, deferment, and other repayment options
● Income tax refund checks and other government welfare payments are garnished.
● Salary garnishment
● The loan servicer or lender could sue you for defaulting, and you may be held liable for any debt collection charges.
● Your official transcript may be withheld by your school.
Private student loans
Because the US Department of Education does not support student loan companies, private lenders have delinquent rules. Your defaulted loan can be sent to a student loan debt collection agency so they can contact you several times for repayment.
Late fees are applied differently by each private student loan provider. Some may impose a price even if you are only one day late, but others may grant you a brief grace period before charging you.
Late payments will be reported to the credit bureaus
If a payment is 30 days past the deadline, the lender has the option of notifying the three bureaus of credit. For the next seven years, you may have difficulty obtaining credit cards or other loans.
You will continue to receive late payment marks on your credit report at each 30-day interval — 60 days, 90 days, 180 days, and so on — until the account is brought current. Each 30-day cycle has a greater detrimental influence than the previous one.
Debt will be sent to collections
Private student loan companies will only let your debt go so far past due before turning it over to a third-party student loan debt collection agency. Debt collectors hired by third parties might either:
● Work on behalf of the student loan provider
● Purchase the charged-off account from the lender.
Each lender will have a different process for collecting
When your financial obligation goes into collections, you can expect a few things. To begin collecting the debt, the collection firm will send you a letter and begin phoning you. The collection account will also appear on your credit record, which will most certainly be accompanied by an unfavorable credit score reduction.
Because some of these collection firms buy the debts for far less than you owe, they could give you a settlement that is less than the initial obligation. In some situations, you may be able to negotiate a pay-for-delete agreement, in which you settle the outstanding debt, and the agency agrees to remove all collection information from your credit report.
Your lender could sue you
After a long period of being in default and following multiple failed collection attempts, the private loan lender or the student loan debt collection agency could attempt to sue you or your loan co-signer for the non-paid balance. In court, a judge may find in favor of the lender or collection agency, allowing wage garnishment or asset liquidation to satisfy the unpaid loan debt.
How can you amend defaulted federal student loans?
It’s not time to give up if your federal student loans are in arrears. Loan rehabilitation and loan consolidation are the two basic choices for resolving your student loan problem.
Loan rehabilitation is the more time-consuming route of restoring your delinquent student loans from the federal government, but it has some additional benefits.
You must commit in writing to make nine monthly payments within 20 days of the mutually agreed-up due dates for repaying a direct loan or FFEL program loan. What is feasible and affordable will be determined by your loan servicer.
These acceptable contributions will be calculated by dividing 15% of your yearly discretionary income by 12 (for the number of months in a year).
In this scenario, your discretionary income is the amount of your most recent tax return’s adjusted gross income that exceeds 150% of the federal poverty criteria in your state.
To rehabilitate a Perkins Loan, you must make all monthly payments within 20 days of the due date for nine months in a row. The amount of monthly payments required to meet the conditions will be determined by the lender. With loan rehabilitation, you will reclaim all of the benefits that your student loans previously provided, including eligibility for:
● Repayment plan options
● Student loan forgiveness programs
Furthermore, the loan servicer will remove the default record from your credit report, while previously missed payment marks will stay for up to seven years.
Consolidating the delinquent loan into a direct consolidation loan (DCL) is an option to loan rehabilitation. To do so, you need to consent to one of the following:
● Repay the DCL through an income-driven repayment plan, or make three consecutive on-time payments to the defaulted loan prior to consolidation.
In the latter case, the payment amounts will be determined by the lender.
If you are repaying your loan through wage garnishment, you must first have the garnishment order removed or the judgment vacated before you can apply for consolidation.
After completing the consolidation, you will receive all of the financial aid advantages and repayment alternatives that were available prior to the default. Unlike loan rehabilitation, however, the default record will remain on your credit report and have an impact on your financial standing for up to seven years.
Full repayment is the final option for resolving a defaulted federal student loan. This entails paying off the entire loan sum, including interest and fees. However, due to their financial circumstances, most defaulting debtors do not have this alternative.
Not paying students loans has a lasting impact
What happens if you don’t make payments on your student loans? Personal financial consequences for failing to pay a bill range from a simple late charge to a negative record on your credit report to wage garnishment. Furthermore, missing payments or loan defaults can have a negative impact on your credit report for years.
Private student loans do not have a standardized cure process (though some lenders may offer means to cure defaulted loans), but federal student loans do. So, if you go behind on your student loans, you can agree to bring them current and, in some situations, have the default removed from your credit report.
One action you can take to secure an excellent financial future is to pay your student loan bills on schedule.