Student Loan Payments Have Restarted: Here's What Happens If You Don't Pay

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If you have federal student loans, you may have enjoyed a break from making payments since March 2020, when the government suspended interest and collections due to the COVID-19 pandemic. 

 

However, this relief period ended as of October 2023, and you are now expected to resume your monthly payments.

·      But what if you can't afford to pay your student loans, or you simply forget to do so?

·      What are the consequences of missing your payments or defaulting on your debt? 

·      And what can you do to avoid or resolve these situations?


In this post, we will answer these questions and provide some tips and resources to help you manage your student loan repayment.


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What Is Student Loan Default?

Student loan default is the failure to repay your loan according to the terms of your promissory note. (For most federal student loans, you will default if you have not made a payment in more than 270 days. For private student loans, the definition of default may vary depending on your lender and contract.)

 

Defaulting on your student loans can have serious negative impacts on your financial situation and future opportunities.

 

Some of the possible consequences of default include:

1.     Your entire loan balance becomes due immediately. This means that your lender can demand that you pay back the full amount of your loan, plus any interest and fees, at once.

2.     Your credit score drops significantly. Your lender will report your default to the three major credit bureaus, which will lower your credit score and make it harder for you to qualify for other loans, credit cards, mortgages, or even rent an apartment in the future.

3.     Your wages, tax refunds, and benefits may be garnished. Your lender can take legal action to collect your debt by taking a portion of your income or assets directly from your employer, the IRS, or the Social Security Administration.

4.     Your loan may be transferred to a collection agency. Your lender may hire a third-party company to contact you and attempt to recover the money you owe. These agencies may charge additional fees and interest on top of your original debt.

5.     You may lose eligibility for federal student aid. If you are in default on any federal student loan, you will not be able to receive any more grants, loans, or work-study funds until you resolve your default status.

6.     You may lose access to repayment options and benefits. If you are in default on your federal student loan, you will not be able to choose from different repayment plans, apply for deferment or forbearance, or qualify for loan forgiveness programs.

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How Can You Avoid Student Loan Default?

The best way to avoid student loan default is to make your payments on time and in full every month. However, if you are struggling to afford your payments or facing financial hardship, there are some options that can help you stay on track or reduce your monthly amount.


Some of these options to avoid default include:

1.     Applying for an income-driven repayment plan. These plans base your monthly payment on your income and family size, and can lower your payment to as little as $0 per month. They also offer loan forgiveness after 20 or 25 years of qualifying payments.

2.     Requesting a deferment or forbearance. These are temporary pauses in your payments that can last from a few months to a few years, depending on your situation and eligibility. However, keep in mind that interest may still accrue during these periods, increasing your total debt.

3.     Consolidating your loans. This is a process of combining multiple federal student loans into one new loan with a single monthly payment and interest rate. This can simplify your repayment and extend your repayment term, lowering your monthly payment.

4.     Refinancing your loans. This is a process of taking out a new private loan to pay off one or more existing loans, either federal or private. This can help you get a lower interest rate or a more flexible repayment term, saving you money or making your payments more manageable.

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How Can You Get Out of Student Loan Default?

If you have already defaulted on your student loans, don't panic. There are still some ways that you can get out of default and restore your good standing.


Some of these ways to get out of default include:

1.     Repaying your loan in full. This is the fastest and most straightforward way to get out of default, but it may not be feasible for most borrowers who have large amounts of debt.

2.     Rehabilitating your loan. This is a process of making nine voluntary and reasonable monthly payments within 10 consecutive months to bring your loan back into good standing. You can negotiate the amount of these payments with your lender based on your income and expenses.

3.     Consolidating your loan. This is another option to get out of default by combining your defaulted loan with another eligible federal loan or by making three consecutive voluntary payments before consolidating. However, this option may not be available for all types of loans or borrowers.

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Where Can You Find More Information and Assistance?

If you need more information or assistance with your student loan repayment, you can contact your loan servicer or lender directly. They can help you understand your options and guide you through the process of applying for different plans or programs.


You can also visit the following websites for more resources and tools:

1.     StudentAid.gov: This is the official website of the U.S. Department of Education's office of Federal Student Aid. Here you can find information about your federal student loans, repayment plans, loan forgiveness, and more. You can also use the Loan Simulator tool to compare different repayment options and see how they affect your monthly payments and total costs.

2.     ConsumerFinance.gov: This is the official website of the Consumer Financial Protection Bureau, a federal agency that protects consumers from unfair, deceptive, or abusive practices in the financial marketplace. Here you can find information about your rights and responsibilities as a student loan borrower, tips and advice on managing your debt, and tools to help you plan your repayment.

3.     StudentLoanBorrowerAssistance.org: This is a website of the National Consumer Law Center's Student Loan Borrower Assistance Project, a nonprofit organization that provides information and advocacy for student loan borrowers. Here you can find information about your private student loans, default and collections, bankruptcy, and more. You can also find a list of legal resources and organizations that may be able to help you with your student loan issues.

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Closing thoughts

Student loan default is a serious problem that can have lasting consequences on your financial well-being and future opportunities. However, it is not inevitable or irreversible. There are many options and resources available to help you avoid or get out of default and manage your student loan repayment successfully.

 

The key is to act as soon as possible and communicate with your lender or servicer. Don't ignore your student loans or hope they will go away. Instead, take charge of your debt and find the best solution for your situation.

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References

1.     Cipriano, C. (2023, January 31). Student loan payments have restarted: Here's what happens if you don't pay. CNET. https://www.federalreserve.gov/publications/2022-economic-well-being-of-us-households-in-2021-student-loans.htm

2.     Federal Student Aid. (n.d.). Repayment plans. U.S. Department of Education. https://nces.ed.gov/fastfacts/display.asp?id=900

3.     Federal Student Aid. (n.d.). Understanding default. U.S. Department of Education. https://www.nitrocollege.com/research/average-student-loan-debt

4.     National Consumer Law Center. (n.d.). Student loan borrower assistance. https://www.bankrate.com/loans/student-loans/student-loan-debt-statistics/

5.     NerdWallet. (2023, August 30). Student loan repayment options: Find the best plan. https://www.chamberofcommerce.org/student-loan-statistics/

6.     U.S. News & World Report. (2023, April 27). Student loan default: What you need to know. https://www.investopedia.com/student-loan-debt-2019-statistics-and-outlook-4772007

 

 

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