Student loan debt is one of the biggest issues impacting Americans’ lives today. According to Pew Research, about 20% of student loan borrowers are in default. You may be tempted to simply ignore your debt, but this is a very bad idea with serious consequences.
In most respects, defaulting on a student loan has exactly the same consequences as failing to pay off a credit card. However, in one key respect, it can be much worse. Most student loans are guaranteed by the federal government, and the feds have powers about which debt collectors can only dream. It probably won’t be as bad as armed marshals at your door, but it could be payday loans in tennessee very unpleasant.
- You may be able to use federal student loan assistance programs to help you repay your debt before it goes into default.
- Let your lender know if you may have problems repaying your student loan.
- Failing to pay your student loan within 90 days classifies the debt as delinquent, which means your credit rating will take a hit.
- After 270 days, the student loan is in default and may then be transferred to a collection agency to recover.
First, You’re ‘Delinquent’
When your loan payment is 90 days overdue, it is officially “delinquent.” That fact is reported to all three major credit bureaus. Your credit rating will take a hit.
That means any new applications for credit may be denied or given only at the higher interest rates available to risky borrowers. A bad credit rating can follow you in other ways. Potential employers often check the credit ratings of applicants and can use it as a measure of your character. So do cell phone service providers, who may deny you the service contract you want. Utility companies may demand a security deposit from customers they don’t consider creditworthy. A prospective landlord might reject your application.
As part of the U.S. government’s response to the 2020 economic crisis, all payments and interest on federal student loans are suspended until .
The Account is ‘In Default’
When your payment is 270 days late, it is officially “in default.” The financial institution to which you owe the money refers your account to a collection agency. The agency will do its best to make you pay, short of actions that are prohibited by the Fair Debt Collection Practices Act (FDCPA). Debt collectors also may tack on fees to cover the cost of collecting the money.
It may be years down the road before the federal government gets involved, but when it does, its powers are considerable. It can seize your tax refund and apply it to your outstanding debt. It can garnish your paycheck, meaning it will contact your employer and arrange for a portion of your salary to be sent directly to the government.
What You Can Do
These dire consequences can be avoided, but you need to act before your loan is in default. Several federal programs are designed to help, and they are open to all who have federal student loans, such as Stafford or Grad Plus loans, although not to parents who borrowed for their children.
Three similar programs, called Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), reduce loan payments to an affordable level based on the applicant’s income and family size. The government may even contribute part of the interest on the loan and will forgive any remaining debt after you make your payments over a period of years.
The balance is indeed forgiven, but only after 20 to 25 years of payments. The payments may be reduced to zero, but only while the indebted person has a very low income.