Failure To Make Student Loan Payments

What Happens If You Don’t Pay Your Student Loans?

For many students, borrowing money to fund college is a reality. We review what happens if you miss payments and how you can manage student loan payments.

While rules vary, missing loan payments by a day or two may not have serious consequences.

Those with federal loans have access to repayment plans that can mitigate risk of default.

Defaulting on loans can lead to legal issues, wage garnishments, and more hardships.

Consequences for nonpayment vary among lenders and whether they're federal or private.

According to the National Center for Education Statistics, 43% of first-time, full-time undergraduates took out student loans during the 2018-19 academic year. The average annual loan among these borrowers was about $7,300.

Understanding the financial responsibilities and consequences that come with loans is vital for student borrowers. This could be especially significant as student loan repayments are scheduled to resume after a lengthy pause due to COVID-19.

We look at some of the issues students may face if they miss student loan payments and what to do if the financial burden of student loan repayments proves unmanageable.

What Happens When You Miss Student Loan Payments?

When you miss student loan payments, the repercussions can vary depending on the type of loan and the timeline of nonpayments. Below, we go over what happens when you miss a loan payment.

One Day: Typically, if you miss a student loan payment by only a few days, lenders won't pile on the repercussions. And while federal loan lenders usually let a one-day lapse slide, various private lenders may manage loans more strictly. While not a given, a missed payment can render a delinquent status, and late fees may apply.
30 Days: For borrowers missing a payment by 30 days, expect to be hit with a late fee — the percentage is usually around 6%. Additionally, at this point, private lenders may report delinquencies to the three major U.S. credit bureaus.
60 Days: At 60 days, borrowers should anticipate that private lenders will report loans as delinquent — remember, private lenders can report delinquent loans even earlier. Sometime after 60 days, federal loan servicers provide borrowers with a written notice of an impending report of delinquency 15 days before its submission.
90 Days: For borrowers of federal student loans, missing payments for 90 days is when tangible consequences begin. After 90 days, loan servicers inform the three major credit bureaus of the delinquency. While timelines can vary between lenders, private loans usually default after three missed monthly payments.
120 Days: By 120 days of delinquency, the majority of private loans enter into default, resulting in consequences like a hard-hit credit score, wage garnishments, and other legal issues. Additionally, at this point, lenders may sell your debt, potentially resulting in endless hounding from collection agencies.
270 Days: At 270 days of delinquency for federal loans, borrowers default on their loans for nonpayment. At this time, the borrower's entire remaining balance is due. As a result, collection agencies may manage the debt, and borrowers can be liable for significant additional fees.

What Happens When You Default on Student Loans?

It's best to avoid defaulting on student loans at all costs. At 270 days of delinquency, federal loans typically go into default, and this comes with a series of relatively serious consequences.

Once a federal loan goes into default, the borrower no longer has access to loan deferments, forbearances, and the flexibility to choose repayment plans.

Borrowers in default also lose access to future federal student aid. Defaulting on student loans also has a significant impact on a borrower's credit score, in both the short and long term. Defaults for both federal and private loans remain on your credit report for seven years after the date of default.

Once in default, a borrower's credit score can drop hundreds of points, hindering their ability to get home loans, car loans, credit cards, and even rental housing. Other consequences include wage garnishment, legal fees, and withheld federal benefits and tax refunds.

What to Do If You Can't Pay Your Student Loans: 4 Options

If your financial situation prevents you from making monthly student loan payments, it's essential to contact loan providers immediately to avoid defaulting on loans.

In addition to the impact on credit scores and various financial repercussions, defaulting on federal loans can prevent your access to future loans and loan deferments or forbearances.

For some students drowning in debt, declaring bankruptcy is available as an undesirable, final option. Even then, there's no guarantee your student loans will be discharged in court.

Here are some options that may better assist borrowers in repaying their student loans.

1. Consider Student Loan Forbearance

If making your standard loan payment is seemingly impossible, student loan forbearance allows you to temporarily suspend monthly payments. Often a last-resort choice, student loan forbearance typically lasts 12 months.

Loan forbearance can end up costing students more in the long run since they continue to accrue interest, with that total added to the principal amount.

2. Look Into Student Loan Deferment

For students who meet requirements, student loan deferments may be a better option than forbearances. Deferments allow you to pause monthly loan payments for up to three years.

Students encountering financial hardship with a federal loan may find a deferment as a reasonable option. Students with private or unsubsidized loans may accrue interest while deferring monthly payments.

3. Consolidate Your Student Loans

Student loan consolidation allows students to combine multiple federal loans. Offered through the U.S. Department of Education, this process pools loans together and results in a single loan. This is often a requirement for various federal loan repayment programs.

Similarly, student loan refinancing refers to a similar process with private loans. However, this option tends to be more suitable for those with good credit and steady income.

4. Enroll in an Income-Driven Repayment Plan

Income-driven repayment plans give loan recipients the option to make payments in proportion to their income. Designed as an affordable payment option, four income-based plans exist depending on a student's particular financial situation and goals.

Most plans have borrowers pay 10% of their discretionary income over 20-25 years. Unemployed borrowers may not have to pay until their financial situation changes.

What to Do if You Can’t Pay Your Student Loans

The “honeymoon” phase for most college graduates lasts exactly six months after graduation.

And lenders don’t care if you’re employed or unemployed. They want to get paid. The honeymoon is over!

So, what can you do if you can’t pay your student loans?

The choices fall into a few categories:

Contact your loan servicer, explain the situation and try to arrange an affordable payment schedule
Cut expenses and increase income to generate enough money to make payments
Contact your loan servicers and sign up for an income-driven repayment plan
Consolidate your loans to lower monthly payments
Extend the “honeymoon” a little longer by seeking deferment or forbearance

None of those look real attractive, but they are the tough choices more and more college graduates are facing while they try to take their first steps in the after-college world.

Consequences for not Paying Student Loans

Some of the consequences for being in default include:

The balance of your loan, plus the interest, become due immediately
You can no longer receive deferment or forbearance
The notice of default will appear on your credit report and affect your credit score
Tax refunds and federal benefit payments (like social security) can be garnished
Your loan holder can take you to court
And there is an even more frightening consequence on the horizon for some defaulted borrowers: You may lose your home.

The federal government hires law firms to place liens on the homes and bank accounts of people in default and the result of that could be your home is foreclosed on.

#1 Thing to Do If You Can’t Pay Student Loan

The easiest way to solve a problem is to start at the source and in this case, that means your loan servicing company if you have a federal student loan or a bank, if you took out a private student loan.

The loan servicers and banks make money if you simply follow the terms of your loan agreement and pay them back the money you borrowed. They lose money if they have to chase you all over to make those payments.

So, it’s in their best interests to be helpful. They should provide you with information on various repayment plans that will make it easier for you to afford monthly payments. You could ask them to have a portion of every paycheck deducted to help meet your obligations.

But be careful who you speak with and listen closely to what they say. Unfortunately, many loan servicers have come under fire for offering misleading or sometimes false information to borrowers that drives up the cost of repaying your student loan.

For example, the federal government filed suit in January of 2017 against Navient, the largest servicer of student loans in the U.S. with 12 million customers who owe $300 billion. The suit alleged that Navient made serious mistakes in the collections process that cost consumers millions of dollars.

Increase Income, Cut Expenses

Two things anyone can do to help themselves out of financial stress is to find a second source of income and/or reduce spending in every category in their budget.

There is money to be made taking a second job as a tutor, a coach, a freelance writer or even taking on the traditional side jobs as a waiter, pizza delivery or babysitting. Create a bank account where any money made on the side goes and use that to make payments on student loans.

The added benefit of a second job is that you have less time to spend money on things like dining out, entertainment, clothes, etc. That means you already should have started cutting expenses in the areas where “want” so often supersedes “need.”

Try a few more expense-cutting steps like getting a roommate to share rent/utilities/food expenses; using public transportation or walking instead of having the expense of a car; move home with you parents until you earn enough to afford expenses and student loan debt.

These might feel like drastic steps, but they aren’t nearly as penalizing as defaulting on a loan.

Enroll in Income-Driven Repayment Plan

Unless you opt out of it ahead of time, everyone with a federal student loan is assigned to the Standard Repayment Plan (SRP), a program that pays off your debt in 10 years. It is the fastest and least expensive way to repay the loans, but also carries the highest monthly payment.

The federal government has come up with several income-driven repayment plans to help graduates get on a more affordable schedule than the SRP.

These programs include Pay As You Earn (PAYE), Repay As You Earn (REPAYE), Income-Based Repayment Plan (IBR) and Income-Contingent Repayment Plan (ICR). Filling out an application is all it takes to join one of these plans and you can move from one to another as it suits your purposes.

The general outline for the four programs is that you will pay 10-15% of your “discretionary income,” depending on which program you choose.

Discretionary income is defined as the difference between your income and 150% of the poverty guideline for your family size and state of residence. For the ICR Plan, discretionary income is the difference between your income and 100% of the poverty guideline for your family size and state of residence.

Your monthly payments for any of these four plans should be less – sometimes significantly less – than what you would pay under the Standard Repayment Plan. For some people, the payment is as low as $0 per month. Any loan balance not repaid at the end of 20 or 25 years (depending on the plan you choose) is forgiven.

Consolidate Student Loans

If you received student loans for more than one semester of college, you probably have multiple loan servicers requiring multiple paychecks at various times a month, maybe at amounts you can’t afford.

Applying for a Direct Consolidation Loan (DCL) could be the answer. A DCL allows you to roll several student loans into one new loan, with a lower interest rate.

It simplifies loan repayment by giving you a single loan with a single check due each month. It is a fixed rate and allows you to stretch your repayment period out to as long as 30 years, which means lower monthly payments.

The DCL only applies to federal loans. Private student loans can’t be consolidated in a federal Direct Consolidation Loan. To consolidate a private loan, you must consult with your bank or review the terms of the loan.

Student Loan Deferment

If all other options are exhausted and you just need time to figure things out, there is deferment.

A deferment will excuse you from making payments for a set period of time, as long as you are:

Enrolled in school at least half-time
Enrolled in a graduate fellowship program
In an approved rehabilitation program for the disabled
Unemployed and seeking employment
Suffering economic hardship
Serving on active duty in the military

There also are deferments available if you have Perkins Loan and are a full-time law enforcement or corrections officer or serving in the Peace Corps.

If you qualify for a deferment on a federally subsidized loan, you will not have to make payments on the loan’s principal during the deferment period, nor will interest accrue. Generally, you cannot qualify for a deferment if your loan is in default; however, in some cases a retroactive deferment may be available. To apply for a deferment, you need to contact your loan holder and submit the appropriate forms.

Deferments also are available for some private loans, but you must contact your lender or review terms of your agreement.

Student Loan Forbearance

Another option you can explore is loan forbearance. In forbearance, you receive permission to stop making payments for a set period of time, or your payments are temporarily reduced. Interest will continue to accrue during forbearance, however.

Forbearance of federal loans are divided into two categories: General and Mandatory. General forbearances usually are granted for the following reasons:

Health or unforeseen personal problems that cause medical expenses
Change in employment
Inability to pay your debt within the maximum repayment term (usually 10 years)
Monthly loan payments total more than 20% of the borrower’s monthly income
Reasons acceptable to your loan servicer

Forbearance is easier to obtain than deferments. Loan forbearances are granted for up to one year at a time, and you may be able to get a forbearance even if you are already in default.

Loan servicers are required to grant mandatory forbearance if any of the following conditions are met:

You are serving in a medical or dental internship or residency program and you meet specific requirements
Total amount you owe per month for all student loans is 20% or more of your gross monthly income for up to 3 years
You are serving in AmeriCorps position for which you received a national service award
You are performing teacher service that would qualify you for teacher loan forgiveness
You qualify for partial repayment of loans under Dept. of Defense Student Loan Repayment Program
You are a member of the National Guard and have been activated by a governor, but not eligible for military deferment

Student Loan Forgiveness and Discharge Options

In some cases, federal student loans can be forgiven in full or in part. Conditions for loan forgiveness include:

Becoming a teacher or other public service professional under specific guidelines.
Service in the U.S. Armed Forces.
Closure of a college before completion of studies.
Fraud or malfeasance on the part of an educational institution.
False certification as a result of crime or identity theft.
Total and permanent disability.

Though it is extremely rare, another way in which a student loan can be completely discharged is through a declaration of bankruptcy, although a borrower must be able to prove “undue financial hardship” in a bankruptcy court.

Courts use different tests and may consider some or all of the following criteria:

You cannot maintain, based on current income and expenses, a minimal standard of living, if forced to repay the student loans.
Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the loan.
You have made good-faith efforts to repay your loans.