I was reading an article yesterday about how 13% of student loan borrowers don't even consider their student loans to be debt. Plus, there are whole forums are Reddit devoted to student loan defaulting on purpose. Crazy? Well, if that didn't surprise you, it probably also doesn't surprise you that 13% of all student loans are in default. That means people are not paying their student loans.
That works out to 7 million student loans that are behind an average of $14,000 each.
So what happens if you don't pay your student loans? Honestly, not paying your student loans one of the worst financial moves that you could ever make. And while you won't go to a debtor prison, you'll likely find yourself in an emotional and financial prison.
Let's break down the process of what happens if I don't pay my student loans.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
What Happens When You Stop Paying Your Student Loan
Your loan technically goes into "default" after not making a payment on the loan for 270 days. For a typical loan, you have a billing date, and then a 28 day grace period to make the payment - the real due date. For example, if your billing date is 1/31, you have until 2/27 to make payment of your monthly payment in full. If you don't make your payment, your loan goes into delinquency status. This also happens if you don't make a full payment.
Once you are delinquent on your loan, your lender will attempt to contact you multiple times. You'll typically get a 30 days past due reminder, a 60 days past due reminder, and a 90 days past due reminder. You'll also likely get several phone calls from your lender as well, to check in and see if you plan on making payment.
Even if you make partial payments, until you bring your total student loan account back into balance, you're still considered in delinquency.
After 90 days of being late on your payment, your lender will typically report the delinquency to the credit bureaus and give you a final reminder to make payment. After 270 days of not making a payment, your loan is in default. At day 330, it will typically be transferred to one of the many student loan collection agencies, or at least the Default Management Resolution Group within the Department of Education.
If you still don't pay, your school, the financial institution that made or owns your loan, your loan guarantor, and the federal government can all take action to recover the money you owe for your student loan debt.
Consequences Of Defaulting On Your Student Loan
If you default on your student loan, the consequences are not good. Beyond ruining your credit score, there are a lot of ways that your lender will try to collect the money.
If you are in default, here's what will happen:
- The entire loan balance and any accrued interest immediately becomes due and payable
- You lose eligibility for certain programs, like student loan forgiveness, forbearance, deferment, and changing repayment plans
- You lose eligibility for additional financial aid
- Your loan will be reported to the credit bureaus as being in default and it will hurt your credit score (if your loan is already in default, you can check your credit score here)
- You can be subjected to wage garnishment to repay the debt (if you are a Federal employee, you could be subject to up to 15% garnishment due to the Federal Salary Offset)
- Your lender could take legal action against you
- Your lender could place a lien on any property you own
- You could have your tax return garnished
- You could have your Social Security and other Federal payments garnished
With all of these, your student loan debt could end up costing you a job, a place to live, and more.
You Can Fix This
There are options to get back out of default without it causing a lot of damage. For example, you can rehabiliate your loans - this is a one-time program that allows you to make nine payments and get the default removed from your credit report.
You'll still have the credit damage from not paying, but it's a big improvement and helps you get back on track.
Read this article about How To Get Your Student Loans Out Of Default.
Better Options If You Can't Pay
If you are having trouble paying your student loans, you should immediately contact your lender. There are a lot of options that could help you, all of which are better than just not paying your student loans.
First, you should look at changing your repayment plan to something more affordable. You could switch to IBR or PAYE, which are income-based plans that could put your payment at $0 if you qualify.
Second, if you are having a temporary hardship, you could ask to have your loans put into deferment or forbearance. This will give you a little time to regroup without having to make payments. Remember, interest will still accrue, but you won't be required to make payments.
Finally, check to see if you qualify for any type of student loan forgiveness program. If you don't qualify for a traditional student loan forgiveness program, you could switch repayment plans to one that includes student loan forgiveness.
With Federal student loans, there's really no reason why you should default. If you can't pay your student loans, there are options to help you. Private loans are a little trickier, but even then, there are options.
A Reminder About Your Student Loan Debt
It's important to remember that, even if you don't pay your student loans, the government or your lender will always get their money for your loan. That's because they can garnish your wages and taxes to make sure that they get paid back.
According to the 2013 Department of Education budget, after the federal government pays collection agencies to recover the loan, the government is likely to recover about 96% of what the borrower owes. Do you see that - so even if you don't pay your loan back, the government, AFTER paying a collection agency, still gets back 96% of what they were owed. You cannot escape your student loans, and not paying them is not the answer.
Have you ever considered ditching your student loans? What steps have you taken?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.