What happens if you don’t pay student loans for an extended period of time is they ultimately go into default. A student loan default impacts your finances — both immediately and in the long term.According to EducationData.org, 10% to 20% of student loans are currently in default.Before reaching this point, it’s important to understand the consequences of not paying your student loans — from delinquency to default — and how to better manage your student loan debt.
Student Loan Delinquency
Your student loan account is marked as delinquent on the first day after your missed student loan payment due date. To return to good standing, you must make delinquent student loan payments in full or reach out to your lender or servicer to request alternative repayment arrangements. Once your student loan payment is 90 days past due, your loan servicer or lender can report the account delinquency to the three major credit bureaus: Experian, Equifax, and TransUnion. A delinquent status on your credit report can bring down your credit score. It can also make it challenging to get approved for new loans, consumer credit, or a rental unit, in addition to services like household utilities and homeowner’s insurance.
Student Loan Default
A failure to pay student loans can worsen from a delinquent status into a “default” status if left unpaid for a longer period. Default timelines vary depending on the loan type. For example, missed Direct Loan payments that remain unpaid for at least 270 days are considered in default, while a private student loan can be reported in default at 90 days past the due date.A defaulted student loan affects your ability to borrow new student loans and other consumer credit, in addition to affecting your finances in various ways. Once your loan is in default, the entire amount of unpaid principal and interest becomes due immediately.
Student Loan Collections
One of the consequences of not paying student loans and going into default is that your unpaid account is sent to collections. At this point, your lender or a collection agency can take steps to collect on your debt through wage garnishment or other means.
Consequences for Not Paying Student Loans
Failure to pay student loans doesn’t simply have a short-term impact on your finances and borrowing ability; in fact, it can have an effect over multiple years. Here are some of the consequences you can expect to face for not paying student loans.
Late Fees
On top of being liable for your outstanding loan principal and interest, your lender might charge additional late fees and collection fees. These unpaid late fees are added to your principal amount and accrue interest, too.
Credit Score Impacts
Once you have an adverse mark on a student debt account, whether a delinquency or default, it will negatively affect your credit score as soon as it’s reported to the credit bureaus.Removing student loans from credit reports takes about seven years from the date of the default. During this time, it might be challenging to borrow consumer loans, like a mortgage to buy a home.
Loss of Loan Benefits
Borrowers who are in default also lose access to the federal loan benefits they once had. This includes participation in loan forgiveness programs, the ability to request deferment or forbearance, and the choice of an alternative repayment plan.Another consequence of not paying student loans and going into default is that you’ll no longer be eligible for federal student aid. This means losing access to new federal student loans, as well as federal grants and other student aid programs.
Tax Refund Withholding
If you fail to pay federal student loans, any future federal and state income tax refunds can be withheld via Treasury offset. The funds are redirected toward paying down your past-due student loan debt.
Cosigner Involvement
Any cosigners who are on your delinquent or defaulted student loans will be negatively impacted by your nonpayment. They immediately will also be held liable for repaying the loan, and the adverse loan account will affect their credit history.
Wage Garnishment
Up to 15% of your disposable income can be garnished from your wages through your employer, if you fail to pay your federal student loans. This arrangement can be enacted by your loan holder without first taking you to court.
Social Security Garnishment
In addition to a Treasury offset and wage garnishment, your Social Security retirement benefit payments can also be garnished to repay your defaulted federal loan.
Suspension of Driver’s or Professional License
Another consequence of not paying student loans is potentially having your driver’s license or professional license suspended. This might impact you if you rely on driving a vehicle to get to work, require a special driver-class license as part of your job, or need to renew your professional license to continue practicing. Put simply, a license suspension due to federal student loan default can greatly affect your career.
Can You Go to Jail for Not Paying Back Student Loans?
As you can see, what happens if you don’t pay student loans can be considerable if you continue to leave your debt unpaid. Despite the list of consequences, however, a jail sentence isn’t among the repercussions you can expect. Nonpayment offenses that might result in arrest or a jail sentence include unpaid federal taxes or failing to pay court-mandated child support. Student loans are considered civil debt, which isn’t an arrestable offense. But if you’re issued a court order about your debt and decide not to appear, you could be held in contempt of the court and arrested.
Ways to Make Your Student Loan Payments More Manageable
There are ways to reduce or manage your student loan debt before you even miss a payment. Exploring one of the options below can help you avoid delinquency or default:
- Student loan forgiveness: Student loan forgiveness programs, such as Public Service Loan Forgiveness, are available to eligible federal student loan borrowers. You must make 120 qualifying payments toward your federal loans, and meet the program’s other eligibility and employment requirements.
- Student loan deferment: Loan deferment temporarily pauses your required monthly payments. During this time, your loan will accrue interest, which is capitalized. Learn more about this repayment relief option in our student loan deferment guide.
- Student loan refinancing: A student loan refinance repays your original student loans, and creates a new loan. It can allow you to secure a lower interest rate. Or, it could offer a lower monthly payment by extending your repayment term; however, this means you’ll pay more toward your debt in the long-run. Always weigh the risks and benefits of refinancing a student loan based on your unique student debt situation.
- Income-driven repayment plans: Federal loan borrowers can request one of four income-driven repayment plans, which can reduce your monthly payment to as low as $0 if you’re eligible. Since terms are either 20 or 25 years, you’ll pay more interest over the life of your loan, but have lower monthly payments.
For more repayment strategies, read our guide to paying off student loans.
Student Loan Refinancing Rates With Lantern
Remember to always consider your long-term needs, in addition to finding a manageable solution for your student loan repayment plan.By refinancing your federal student loans, for instance, you’ll lose access to government benefits, like loan cancellation, income-driven repayment, and extended deferment and forbearance options that can be useful in the future.
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7 fast ways to pay off student loans
Many people dutifully make their student loan payments every month, only to feel like they’re progressing slowly — or not at all — toward debt freedom.
That could be due to the fact that when paying down student loans, much of your hard-earned money goes toward interest. To really make a dent in your balance, you’ll want to pay more than your required payment each month — but also to do so strategically, and perhaps in combination with other methods, like refinancing.
Here are 7 ways to pay off your student loans fast:
1. Understand how interest works
2. Talk to your loan servicer about your payments
3. Consider refinancing your student loans
4. Focus on earning more
5. Look into a federal direct consolidation loan
6. Set up automatic student loan payments
7. Make lump-sum payments whenever you have extra funds
Anchiy
The first step to paying down student debt quickly is to understand how student loan interest works.
Lenders collect interest from you in exchange for borrowing money. It’s calculated as a percentage of the amount borrowed, and on federal student loans, for instance, interest accrues daily.
To better understand how interest works, here’s an example. Let’s say you have a $50,000 federal student loan with an APR of 7%.
To find out how much interest accrues per day, use this formula:
(Interest rate) x (current principal balance) ÷ (number of days in the year) = daily interest
Here’s how the example looks using the formula above:
(.07) x ($50,000) ÷ (365) = $9.59
This shows you are being charged close to $10 per day just in interest. In a 30-day month, with this example, you’ll pay $287.70 in interest. That means if you make a monthly payment of $500, only $212.30 is going toward the principal.
Private loans may calculate interest differently. Your private loans may also come with variable interest rates, which can change over time, rather than a fixed rate.
Ultimately, it’s important to look at your repayment history to see exactly how much the lender applies to interest and how much it applies to the principal balance.
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Make sure you also understand how your loan servicer distributes your payments. For example, if you make an extra payment and have multiple loans managed by the same company, the way that payment is applied depends on your loan servicer. The company may put the extra toward the highest-interest loan, or it may apply it to a future monthly payment.
But if you want to get out of debt fast, paying off high-interest loans first is the best route.
For example, let’s say you have a federal undergraduate loan with a 4.53% interest rate and graduate loans with 6.08% and 7.08% interest rates.
Focus on paying off the 7.08% graduate loan first. That’s because it’s currently costing the most in interest per month.
If it’s not clear how to designate your loan payment to a specific loan on your servicer’s online portal, discuss your options with the company. Provide instructions in writing if necessary.
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Student loan refinancing could help you cut down on interest, and making it easier to pay off loans faster, especially if you have private student loans. Here’s why:
- Private student lenders often charge higher interest rates than what you’d get with federal student loans.
- Your interest rate may be variable, meaning it can increase over time. Refinancing gives you the option to switch to a fixed rate.
- Refinancing federal loans turns them into a private loan, and you’ll no longer be able to take advantage of certain federal loan benefits. But your private lender may have limited deferment, forbearance, payment reduction or forgiveness programs, meaning you have less to lose by refinancing.
If you have both federal and private student loan balances, be sure to first assess whether you should refinance your federal student loans. Consider the following:
- Do you qualify for one of the several federal student loan forgiveness programs? If you refinance, you’ll lose your eligibility.
- Do you plan to use special federal repayment plans like income-based repayment? Few private lenders offer these options.
- Will you save money? Depending on the type of federal loan, you may already have a low, fixed interest rate.
To get started with refinancing, explore multiple lenders and find the best rate for you. Many companies give prospective borrowers the option to get an interest rate quote without submitting a full application, which can help you compare offers.
Use a refinancing calculator to calculate how much you could likely save, which can help you decide whether refinancing is a smart choice based on your circumstances.
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Making additional payments toward your loans can be difficult if the majority of your discretionary income is already going toward them. But one way to pay down loans faster is to focus on earning more money.
Consider starting a side hustle, getting a part-time job or selling items you no longer use. Commit to putting any extra money you make toward debt.
Working extra might sound difficult now, but think of it as a temporary solution so you can make progress on your loans. Celebrate when you hit key milestones, like paying off individual loans or getting your balance down to a certain threshold, to keep yourself motivated. Use a prepayment calculator to see just how much time and money you can save by adding a little more to your payments each month.
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If you have multiple federal student loans, look into combining them into a single direct consolidation loan. Consolidation can make your loans easier to manage, organize and repay by giving you one monthly payment from a single servicer.
Note, however, that consolidation may leave you with a longer repayment term, which could mean a lower monthly payment, but more interest charges overall. If you’d like to use it as a strategy to pay off loans fast, consolidate federal loans to streamline bills — then put extra money toward your payment each month to get rid of the balance.
In order to qualify for a direct consolidation loan, you must have at least one direct loan or Federal Family Education Loan (FFEL) that is in repayment, deferment or default status, or in its grace period. In-school loans are not eligible.
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Setting up automatic student loan payments has multiple benefits that will help you pay down your balance faster. First, many lenders offer an interest rate reduction of 0.25% in exchange for having autopay in place. While a fraction of a percentage point may not sound like much, you will save money over time and a greater portion of your monthly payments will go toward paying off your principal.
Automatic payments will also help you ensure you pay your bill on time, every single month. That’s important for keeping your credit strong; payment history is the biggest contributor to your credit score, which helps determine whether you may qualify for loans or credit cards in the future.
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There may be times when you have more money in your pocket than usual, like when you receive a tax refund or a year-end bonus. Consider applying at least some of that cash to your student loan balance.
As is true when making additional payments through other methods, this ensures that more money than usual will go toward your principal. Use a lump sum extra payment calculator to get a sense of just how big of a difference that larger-than-normal payment will make.
Having a student loan balance is no fun, especially when it feels like so much of your money is going toward interest. But with a plan of action, you can start to tackle your student loans and make progress.
Tara Mastroeni contributed to this article.
This article originally appeared on StudentLoanHero.com and was syndicated by MediaFeed.org.
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Featured Image Credit: simonapilolla / istockphoto.
