If your student loan payments seem overwhelming, you’re not alone — one in ten Americans has defaulted on a student loan, according to the Education Data Initiative.
So what happens if you don’t pay your student loans? Late or missed “deliquent” payments can make it harder to get a credit card, car loan, or apartment lease. And if you default on a loan, the balance of the loan will become immediately due, your wages may be garnished, and your tax refund can be withheld, among other serious consequences.
There are several options that can help you avoid defaulting on your student loan, such as deferment, forbearance, and income-driven repayment plans. Here’s what to know before you stop making payments on your student loans.
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Do Student Loans Ever Go Away?
U.S. borrowers owe a combined $1.7 trillion in student loan debt.
The short answer is no, unless you’re part of the Public Service Loan Forgiveness Program. Unlike other forms of debt, such as home and auto loans, student loans generally cannot be discharged during bankruptcy. Borrowers are still required to repay student loans even if they don’t graduate or are struggling to find a job.
So what happens if you don’t pay student loans? In addition to the interest that accrues over time and increases the amount you owe, failing to repay a student loan on time can result in additional fees if your debt gets moved into collections.
Because on-time payments account for a portion of a borrower’s credit score, failing to make payments can negatively impact a person’s credit score. Having a low credit score can impact your ability to get a mortgage, car loan, credit card, or apartment lease.
If you default on federal student loans, the government can take your tax refund or up to 15% of your wages. You can also be sued, though this is more common with private loans.
Recommended: Guide to Establishing Credit
Is There a Student Loan Statute of Limitations?
There is no statute of limitations for federal student loans. That means you can be sued at any point for not paying your loans.
There is a statute of limitations for private student loans, which is set by individual states and generally ranges from three to 10 years. But even this limit just means the lender can’t sue you anymore — it doesn’t mean the loan goes away or they stop trying to collect what is owed.
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Is Getting Out of Paying Student Loans Possible?
There are options that allow borrowers to temporarily stop making student loan payments. Here’s what happens if you don’t pay your student loans because you’ve been approved for one of these plans.
Relief for Federal Student Loans
If you have federal student loans, you can temporarily pause payments by requesting a deferment or forbearance. You might qualify if you’re still in school at least part-time, unable to find a full-time job, facing high medical expenses, or dealing with another financial hardship. The type of loan held by the borrower will determine whether they can apply for a deferment or forbearance.
Federal student loans can be deferred for up to three years. There are two types of forbearance; general and mandatory. Borrowers facing financial difficulties can request a general forbearance, and their loan servicer determines whether they qualify. General forbearance is awarded in 12-month increments and can be extended for a total of three years.
You can temporarily pause payments on your federal loans by requesting a deferment or forbearance.
Loan servicers are required to award qualifying borrowers a mandatory forbearance. Qualifications include participating in AmeriCorps, National Guard duty, or medical or dental residency. The Federal Student Aid website has a full list of criteria for mandatory forbearance. Mandatory forbearances are also granted in 12-month increments but can be extended so long as the borrower still meets the criteria to qualify for mandatory forbearance.
Borrowers who enroll in an income-based repayment plan can qualify to have their loan balance forgiven after a certain amount of time; the amount of time depends on the plan. (Keep in mind, you’d still have to pay taxes on the amount forgiven.)
In rare cases, certain loans can be canceled or discharged, if your school closes while you’re enrolled or you are permanently disabled. For obvious reasons, these aren’t options to count on, so you can assume your loans will be sticking with you.
Consequences of Defaulting on Your Student Loans
As mentioned earlier, what happens when you stop paying student loans is that the loan is at risk of going into default. The national default rate was 7.3% for fiscal year 2018 (the most recent year for which numbers are available), according to the U.S. Department of Education. There are serious financial repercussions for defaulting on a student loan.
For federal student loans, if a borrower fails to make payments for more than 270 days on a loan from the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, the loan will go into default. (For loans made under the Federal Perkins Loan Program, the loan can be declared in default after the first missed payment.)
At this point, the balance of your loan becomes due immediately through a process called “acceleration.” You’ll also lose eligibility for federal programs such as deferment, forbearance, income-driven repayment plays, and additional federal aid.
Recommended: Student Loan Refinancing Guide
Your wages may be garnished (meaning that your employer may be required to hold back a portion of your paycheck) and any tax refunds or federal benefit payments may be withheld. Defaulting on a student loan will damage your credit rating and you may not be able to buy or sell certain assets, such as real estate. If your loan holder sues you, you may also be charged related expenses such as attorney fees.
Temporary Relief for Private Student Loans
Private lenders sometimes offer relief like forbearance when you’re dealing with financial hardship, but they aren’t required to. If you have a private student loan, check with your lender directly to see what temporary relief programs or policies they may have.
Private student loans generally go into default after 90 days. Private lenders may also take you to court or use collection agencies to collect your student loan debt. Whether you have federal or private student loans, contact your loan servicer immediately if your loan is delinquent so you can understand what options are available to you before your loan goes into default.
Recommended: Should You Refinance Your Student Loans?
The Takeaway
Because student loans don’t disappear, it’s important to stay on top of payments. Borrowers with federal student loans may be able to qualify for deferment, forbearance, or income-based repayment options which can provide some temporary relief or help make monthly payments more manageable. Options available for borrowers facing financial hardships with private student loans vary by lender.
For some borrowers, student loan refinancing can be a one way to lower interest rates, reduce monthly payments, and combine all your loans into a single monthly payment. Reducing monthly student loan payments by extending the life of the loan may result in more interest over the life of the loan. If you qualify for a lower interest rate, you can save money over the life of the loan. (You can get an idea of how much you could save using SoFi’s student loan refinancing calculator.)
It’s also possible to refinance both federal or private loans, or a combination of the two. It’s important to understand that if you refinance federal loans, you’ll lose access to federal benefits and protections, including deferment, forbearance, income-driven repayment, and forgiveness so it’s not recommended for borrowers who are planning to take advantage of those programs.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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