What Happens If I Can’t Pay My Student Loans?

Written by: David Scott

Count five things that are negatively impacting Americans today, and you can bet your salary on student loan debts being in the top three. It is undoubtedly one of the issues the U.S government is battling yearly. But unfortunately, it’s no longer an impending crisis but a pandemic. 

What happens if you default on student loans? 

According to research done by Pew, over 20% of student loan debtors are currently defaulters. Ignoring your debt is a bad idea that comes with dire consequences. Defaulting on this type of loan attracts the same consequences as defaulting on credit card debts. 

But what exactly happens if you default on your student loans? Well, that’s what you’re about to find out. 

The Loan Becomes Delinquent 

The day after you default on the loan, it (the student’s loan) becomes delinquent. It stays this way until the loan payment is up to date. For every payment date missed, you might also incur a late fee. Delinquent student loans are reported when they are 90 days overdue. Your action will be reported to the three credit bureaus. When this occurs, your credit rating will be the worse for it.

And when your credit score takes that hit, new credit applications will automatically be denied. But that’s not all – a bad credit rating is like your shadow; it follows you differently. Not being able to take loans isn’t the only thing to worry about. You’ll find it difficult to get an apartment or credit cards. 

The longer a loan is past due, the worse the consequences or ramifications become. Once it exceeds 270 days, it enters default. The entire process is faster with other loans. Meanwhile, on the other hand, private loans enter default after 120 days (approximately four months). 

Your account enters default

Moving forwards, when the payment becomes 270 days late, it enters default. The financial institution you (as the student) took the loan from will refer your account to a debt collection agency. The agency will then do its best to get the money from you. However, the actions taken to get the money back are short of actions prohibited by FDCPA. The debt collector agency may also add more fees to help cover the cost of collecting the debt. 

But when will the federal government get involved? It varies. There isn’t a fixed date. It may take years before they get involved. But the time it takes for the government to get involved isn’t the problem. The real problem is what they do when they get involved. For one, they can hold on to your tax refund and use it to pay your outstanding loan. But that’s not the only option they’ve got in their arsenal. It might also garnish your paycheck or, worse, legal action. 


Here is what happens when you default on your student loans:

  • Lose loan benefits 
  • Lower credit score 
  • Wage garnishment 

How Can I Pay My Student’s Loan Faster?

This article aims not to hammer on the consequences of defaulting on the loans but to show you solutions.

To be fair, you can’t put a price on quality education. And if taking a student loan is how you choose to get it, it’s worth it for sure. But what can you do when you default? If this is the question you are asking, you aren’t getting the concept, at least not all we’ve been talking about. The real question you ought to ask is: how can I pay my student loans faster? 

Acting fast will help you avoid the dire consequences – which means you have to pay back the student loan before it enters default. One of the best options you can explore is federal programs. These programs are designed for all students with federal student loans, such as Grad Plus, although it doesn’t work for parents who take loans to pay for their children’s education. 

Pay As You Earn, Income-Based Repayment and Revised Pay As You Earn are three similar programs. These programs help reduce the loan payments to make it easy to pay back at affordable levels. The plan is based on the applicant’s family size and income. 

Meanwhile, the government may pay part of the interest incurred on the loan and forgive the rest of the debt – you just have to make sure you make the needed payments over a period of years. Then, if you are regular with the payment, you’ll get loan forgiveness or discharge. These are the main types of discharge and forgiveness. 

  • Teacher Loan Forgiveness 

Teacher loan forgiveness is available for about $17,500. It is ideal for teachers who have been low-income earners for five years. 

  • Public Service Loan Forgiveness 

Public service loan forgiveness is for student loan defaulters employed by the government or an NGO. These employers must be making at least 120 early payments. 

  • Total and Permanent Disability Discharge 

This disability charge is available for loan defaulters who are disabled 

  • Closed School Discharge 

Closed school discharge is available for employees whose school closes while enrolled afterward. 

The balance is without a doubt forgiven after 20-25 years of consistent payment. The payment is also reduced to zero while the indebted person has a low income. Private student loans work differently. This type of loan does not qualify for any forgiveness program right now. Meanwhile, the statute of limitations is decided at the state level, not the federal level. 

Both the government and banks have legitimate reasons for working with student loan defaulters, especially people who have trouble paying back their loans. The sad news is that student loan debt is at its all-time high, with more than 40 million people now owing at least $39 000. Also, this loan will always be on your credit report for seven years after the delinquency date. 

If you find yourself in this precarious state, alert them as soon as you see the trouble coming. Don’t take the ostrich approach – ignoring the trouble won’t make it go away; it will only worsen the situation. Staying educated on the ins and outs of student loans is the first step to empowering yourself to make decisions that will set you up for success. By reading the Money Descriptor, you’re taking steps to become more knowledgeable in the world of personal finance.

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