For many student loan borrowers, the thought of October 2023 inspires chills that have nothing at all to do with Halloween. After a three-year hiatus, the debt ceiling deal approved by Congress has awoken federal student loan payments from their slumber.
All across America, borrowers are charting their next personal finance moves accordingly. Which brings us to a question that most student loan borrowers have probably wondered – whether they dared actually Google it or not. What would happen if you just didn’t pay your student loans?
Recently, Andy Hill decided to sit down with Robert Farrington, millennial money expert and founder of The College Investor, to find out.
While private student loans are a beast all their own, we’re going to stick to federal student aid for today. That way we can really hone in on what you should know before you decide to insight a revolution among student borrowers everywhere.
The Financial Consequences of Not Paying Your Student Loans
If you just kept missing payments on your federal student loans, what could the government really do about it? Quite a few things, as it turns out – and “yikes” is an appropriate response to all of them.
As Robert Farrington put it, “Not paying your student loans is probably the worst financial mistake you can make.” He then clued us in on the harrowing consequences of defaulting on your student loan payment program.
The Dark Side of the Department of Education
Deep inside the shadowy realms of the U.S. government, there exists a dreaded organization known as the default resolution group which feasts on defaulted loans like Gremlins after midnight. If you keep missing student loan payments long enough, your information will ultimately find its way to their lair.
They’ll then begin encouraging you to deal with your loan default with an enthusiasm that could make a mob enforcer blush. In all seriousness, you can rest assured that the federal government has no plans to send a guy named Vinnie over to threaten your kneecaps.
But it’s important to understand that there are a whole host of unsavory actions it can take against you. Whereas default private student loans can be sent to collection agencies, the government has its own ways of dealing with perpetually missed payments. Let’s take a closer look at some of their scarier tactics.
If an official nudge isn’t enough to convince you to begin making payments again, the government is well within its rights to garnish money from your paycheck. When it comes to federal student loans, there is no statute of limitations, which means that this could go on for decades unless you deal with it.
But before you decide to use wage garnishment as an automatic payment plan, there are a few things you need to know. First, it isn’t free. You’re going to get hit with a hefty 20% a month collection fee, on top of student loan interest and late fees.
Additionally, you may be fired if you’ve been hit with two or more wage garnishments. Things get even dicier if you work for the government, in which case you could lose your security clearance, job, or both.
Intercepted Tax Refunds and Benefits
You know that nice tax refund you look forward to each year? Prepare to bid it a fond farewell. The government has the power to administratively intercept tax refunds or any other benefit payments you may be entitled to and sink them straight into your delinquent student loan debt.
This can even affect the social security benefits of parents who have taken on Parent PLUS loans. For this reason, Robert highly advises parents to reconsider before they borrow money in their own name for a child’s education. More often than not, he explains, such set-ups tend to lead to more family drama than they are worth.
Credit Score Considerations
Keep in mind that the federal government is pretty palsy with all the major credit reporting agencies. If you’re not making payments on your federal loans, don’t count on them being shy about reporting your shenanigans to their buddies at the credit bureaus.
The terrible truth is that refusing to pay your student loans is one of the best ways there is to bulldoze your credit rating. The less flattering you allow your credit report to become, the harder and more expensive it will be to secure any future loans. There’s simply no hiding a lower credit score from public or private lenders who might be in a position to provide you with anything from a mortgage to an auto loan.
What You Need to Know About Paying Off Federal Student Loans
By this point, most of us would probably agree that defaulting isn’t the smartest way to go. But what if you’re facing financial hardship or can’t keep up with your monthly payments? Luckily Robert was able to give us some great pointers on repayment plans on how to manage student debt while keeping your credit history intact.
Choose the Right Student Loan Repayment Program
While federal student loans may not be any more fun to repay, they do have several benefits over private loans. One such perk is that you can change your repayment plan for free at any time. As Robert explains, “If you’re one of the 20% of borrowers that have never made a payment before because you graduated in the last three years, you default into the standard 10-year repayment plan.”
The good news is that if the plan proves too pricey, you can opt for a different one, such as the new Saving on a Valuable Education (SAVE) Plan. Under the SAVE Plan, your payments will be capped at 5% of your income, which can dramatically reduce costs for many borrowers.
If you make less than $38,000 a year as an individual or $65,000 a year in joint income, you may even qualify for a $0 minimum monthly payment. In effect, the SAVE Plan is designed to keep student loans manageable and may even allow you to pause payments with no damage to your credit score.
Student Loan Forgiveness
While many borrowers hope that federal student loan payments will one day disappear altogether, Robert cautions against holding your breath. Sure, the thought of nobody ever having to pay student loans again is a lovely one. Unfortunately, it would take a lot of government cooperation that shows no signs of manifesting any time soon.
But Robert then clued us in on a little-known fact, “Today, with no changes to the law, 50% of all student loan borrowers qualify for some type of student loan forgiveness program.”
All income-driven repayment plans, for instance, include some type of loan forgiveness timeline. The kicker, however, is that you may have to wait 20–25 years to reach the threshold. Nonetheless, it’s definitely worth looking into the fine print to find out if your program forgives student debt at a certain point.
There’s also a great program called Public Service Loan Forgiveness (PSLF), which wipes out the remaining loan balance of anyone who has worked in public service for ten years. The key is understanding just how broad the qualifications for this gem of a program can be. Whether you’re a librarian, on the full-time cleaning staff at the mayor’s office, or a receptionist at a public school, be sure to check with your loan servicer to see if you qualify.
Should You Pay Your Student Loans Off ASAP?
Not necessarily, says Robert. While most borrowers assume that it’s best to pay off their loan as quickly as possible, this may not be the case for some borrowers on an income-driven repayment plan.
If you make more than you owe, then paying off your loan aggressively isn’t a bad idea.
But if you owe more than you make, you may be better off on an income-driven repayment program that offers debt forgiveness, no matter how far down the line. As you continue making your minimum monthly payment, you can legally lower your adjustable gross income by investing more money in your 401(k), traditional IRA, or HSA, to build wealth for the future.
Final Thoughts on What Happens If You Don’t Pay Your Student Loans
What happens if you don’t pay student loans? Nothing good! Fortunately, taking a good look at your options can help you manage student debt without racking up missed payments.
Be sure to review available repayment options like SAVE and forgiveness options as well. These programs may give you some more breathing room during a difficult time in your life.
Does this article help you answer the question “What happens if you don’t pay your student loans”? What other student loan questions do you have?
Please let us know in the comments below.