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

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Federal student loan payments are resuming October 2023.
The pause on student loans is officially ending. Learn what measures the U.S. Department of Education is taking to help borrowers from falling behind on payments.

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Don’t expect student loan issuers to be lenient about missed payments just because the majority of their borrowers are young (and broke). The penalties for failing to pay back educational loans can be harsh. Both private and public student loan lenders have the ability to garnish wages and tax refunds, and missing student loan payments could also easily ruin a person’s credit, making it near-impossible to buy a new vehicle, buy a home, or open a new credit card to help manage day-to-day expenses.

But exactly what happens when you can’t pay student loans? We break down the timeline of when missing student loan payments become a serious problem along with all of the possible repercussions and, most importantly, 7 solutions if you can’t pay your student loans.

What to expect when you can’t pay student loans off

If you can’t pay student loans according to the set payment schedule, you risk heading for default. But there are quite a few things that happen before things get to that point and if you can stop the situation in time, you could save yourself from harsh debt collection efforts.

A day or two after a missed payment

The first time you miss a student loan payment, your loan may be subject to late fees and penalties (which should be outlined in your original loan agreement). If you’ve never had any issues with payments prior to this instance, your loan provider may be willing to waive these penalties as a one-time forgiveness. It won’t hurt your credit score to do so, so it’s always worth calling to inquire about. If you can make the payment shortly after the missed due date, you likely won’t find a late payment notice on your credit history either.

30 days after a missed payment

After 30 days of nonpayment student loans become delinquent, a status that may be subject to additional fees and penalty charges as outlined in your original loan agreement. These missed payments are also reported to the credit bureaus and will appear on your credit report shortly after. This will significantly impact your credit score. Missed payments will continue to be reported at 60, 90, and 120-day intervals as well, and each one can continue to hurt your score.

As for the loan itself, it will continue to accrue interest. If you’re not making payments, expect your balance to be higher once you have the means to start paying it again.

9 months after a missed payment

After 270 days, the equivalent of 9 months without a payment, overdue loans move to default status. When this happens, you may find yourself barraged by phone calls and letters from your lender trying to get their money back. You could potentially find yourself in legal trouble, sued by the lender, and taken to court.

At this point, the lender may decide to write your loan off as a loss and sell it to a collection agency, an act commonly referred to as going to collections. Interest charges and fees can still apply at this stage as well. It’s entirely legal for a collection agency to keep adding to what you owe.

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Consequences of defaulting on student loans

Your credit score takes a hit

Payment history comprises around 35% of your credit score, the three-digit number that lenders and credit card issuers rely on to determine whether you’re creditworthy.

Defaulting on a student loan can affect your credit score negatively, causing lenders and credit card issuers to deny loan and credit card applications.

You lose eligibility for certain repayment plans

A forbearance allows the borrower to stop making payments temporarily while interest continues to accrue. With a deferment, you may not be responsible for paying interest that accrues on the loan for the deferment period.

Default on a federal student loan, however, and you will no longer have access to forbearance and deferment repayment options offered by the U.S. Department of Education.

The entire loan balance becomes due

When your federal student loan goes into default, the entire balance is accelerated, becoming due immediately, according to the U.S. Department of Education.  If this happens, you need to act fast.

Contact the loan holder right away to ask about a repayment plan that will allow you to resolve the default before its negative consequences ripple through your life.

You can’t get more student loans while in default

Want to go back to school so you can get a better job and back your student loans? If your loan is in default, you’ll pay tuition without federal help.

When you default on a federal student loan, you lose eligibility for additional federal student aid. If you contact the lender and set up a repayment plan, you may eventually be able to get student loans again. Until then, no more federal student loans for you.

Your student loan debt grows larger

While your student loan is in default, capitalized interest accrues and gets added into the loan principal. If you stop paying for years, your student loan amount can double or triple, morphing into a seemingly insurmountable debt.

If your loan is in default, contact the loan holder about loan rehabilitation. For example, to get your William D. Ford Federal Direct Loan or Federal Family Education Loan out of default, you may be able to make nine affordable monthly payments during a period of 10 consecutive months.

The IRS can seize your tax refunds

Once your loan is in default, say goodbye to tax refunds you could use for vacations, a new car, or paying bills. That’s because the IRS will likely seize your tax refund, thanks to a government procedure known as a “treasury offset.”

With treasury offset, the amount of your federal tax refund is withheld and applied toward repayment of the defaulted loan.

Your wages will be garnished

Defaulting on your federal student loan doesn’t give you a pass on loan repayment since the government isn’t big on forgiving people who default on student loans. And what better place to look than your employer?

The U.S. Department of Education may garnish your wages, requiring your employer to withhold a portion of your paycheck to send to the loan holder toward repayment.

Your social security checks shrink

If you think being old and retired will quench the government’s bloodthirst for repayment of your federal student loans, get ready to fork over a percentage of your monthly Social Security check. The government may be able to take around 15% of your monthly benefit payments if your student loan is still in default when you begin drawing social security benefits. [1]

7 Things to do when you can’t pay your student loans

Ideally, you want to avoid default if it’s at all possible even if you can’t pay student loans off given your current financial situation. Here are a few options that can help.

Option 1: Switch the payment due date

Spreading out your payments can go a long way to alleviate the strain on your wallet. For example, if your rent is due on the first of the month, your car payment on the 7th, and your student loan on the 10th, that’s a big chunk of expenses for one paycheck to cover. Changing a due date will give you more breathing room and allow you to keep some cash on hand for emergencies or other living expenses. This can be done for many types of expenses including student loans, credit cards, and even mortgage payments. Other expenses like utilities and car insurance usually allow for changing payment due dates as well.

The next part is picking a payment date that’s more convenient for you. Aim for a date that’s the day of (or shortly after) you get your paycheck to minimize the risk of overdrafting your accounts. But, as mentioned make sure your payment dates are spread out and don’t fall onto one paycheck. Grab a calendar and map out all of your payment obligations – rent, every credit card, car insurance, cell phone, utilities, internet – anything you can think of. Space out your payments so that they’re more evenly distributed to different paychecks, but would leave you with enough in the bank when your rent or mortgage comes due.

Option 2: Switch to an Income-Driven Repayment plan

If you have federal student loans, changing to an income-driven repayment plan can significantly lower your monthly payments relative to your income and household size. If your income is below a certain level, you may pay nothing at all. But they don’t penalize you for a missed payment. It’s counted as you made the payment, but your payment happened to be $0.

“Most federal student loans are eligible for at least one income-driven repayment plan,” according to the U.S. Department of Education. If your income is low enough, you may even be able to get your payment as low as $0 per month while you sort out your finances.

Option 3: Defer your student loans

This option allows you to postpone payments on your student loans. Depending on the type of loan, like federally subsidized loans, the federal government will pay interest charges during loan deferment so that your student loan balances won’t increase during deferment. At the end of the deferment period, you’d owe exactly what you owed when you started.

If your interest charges aren’t paid by the government, then interest would continue to accrue even though you’re not required to make payments. That means your balances will be higher at the end of the deferment period. This is typically the case with unsubsidized federal loans or private student loan issuers that offer deferment.

Who is eligible for deferment? Typically, to qualify for deferment you must indicate either financial hardship or some other extenuating circumstance that would justify you not making your loan payments. You may be able to defer your loan payments if you are:

  • Unemployed
  • Underemployed and able to prove financial hardship
  • Enrolled at least half-time in school
  • Serving in the military or Peace Corps.

You must apply for a deferment directly with your loan servicer. All federal loans (both subsidized and unsubsidized) are eligible for deferment. Some private student loans may also qualify for a deferment if the lender offers it.

When is deferment the best option? Deferment is best used when you can prove you don’t have the income to make any payments. If you don’t have any income coming in or you can show that your income doesn’t cover your bills and other expenses, then deferment is the way to go.

Option 4: Forbearance

Forbearance is similar to deferment in that the lender agrees to reduce or stop your monthly payments temporarily. The key difference is that payments are only postponed for a limited amount of time – typically 12 months maximum.

At the end of forbearance, you must return to the original repayment schedule. Some lenders may also require “catch-up” payments where you pay more or make extra payments to catch up on what you missed. As with deferment, the government covers interest charges that accrue during forbearance on subsidized federal student loans. On unsubsidized loans, where interest charges continue to accrue, your balances may be higher at the end of forbearance.

Qualifying for forbearance: Like deferment, you apply for forbearance through your loan servicer. All federal loan servicers offer forbearance. Many private student loan servicers do, as well. Contact your lender before you miss payments. As long as you can show that you’re facing financial hardship and can’t afford to make your payments, the lender will work with you to find a solution.

When is forbearance the best option? Forbearance is easier to qualify for than a deferment. If you can prove financial hardship or show you have an illness that leaves you unable to work, you can usually qualify for forbearance. Federal student loan servicers and even private lenders also offer forbearance during residency programs or if you’re in the National Guard and the Guard is activated by your state governor.

Option 5: Explore Loan Forgiveness Programs

The U.S. Department of Education offers several paths to student loan forgiveness that could eventually get rid of your student loan debt for good, no matter how large your student loan balance.

The most popular and well-known program is Public Service Loan Forgiveness or PSLF. People who work at specific companies and industries can have their loans forgiven after 120 consecutive payments while working at their qualifying job. There are also profession-specific forgiveness programs like those for teachers and military veterans.

Qualifying and proving eligibility can be a long and time-consuming process, but be patient!

Option 6: Consolidate your student loans

Consolidating your student loans can make paying them more convenient and more affordable to pay off – but doing so isn’t going to drastically lower your monthly payment. Essentially, it’s taking out a new loan (with a private lender) to pay off the old loan. The new loan has an entirely new set of repayment terms and can result in an interest rate or a longer loan payoff period, which can help lower the amount owed each month.

Student loan consolidation can be done for both federal and private student loans. However, since consolidation is only available through private lenders, using this option to consolidate federal loans will result in a loss of eligibility for all federal programs and benefits like public service loan forgiveness or repayment plans. Think carefully before deciding to combine loans with private consolidation.

Qualifying for private student loan consolidation: Student debt consolidation loans are offered through private lenders. Therefore, qualifying is based on standard creditworthiness measures like your credit score and debt-to-income ratio. The good news is that student loan servicers tend to have more flexible lending standards. So, even if you have bad credit or no credit, you can often find a service that’s willing to work with you.

When is private consolidation the best option? Private consolidation is best when you have the means to make payments on your student loans but just want a better interest rate and a little more breathing room. It’s not a viable option for people facing financial hardship who can’t afford to make payments at all.

Option 7: Head back to school

When you enroll in an eligible college or career school at least half-time, in most cases, your federal student loan will automatically be placed in deferment. Getting an advanced degree could help you earn a significantly higher salary that could make paying off loans much easier. It’s a gamble, and certainly not for everyone, but it’s an option.

One pretty big caveat is that going back to school will mean taking out even more loans. If you can’t afford the loans you already have, this could very well make the problem worse. This option is ideal if you can find some sort of assistance like a tuition reimbursement program through an employer or scholarships.

Financial SituationBest Solution
UnemploymentDeferment
Short-term unemploymentForbearance
Out of work due to illness or injuryDeferment
Unable to work due to temporary illness or injuryForbearance
Under-employedDeferment or Forbearance, depending on severity of financial hardship
Low-incomePayE or RePayE hardship-based federal repayment plans
Struggling to afford all individual loan payments, but not facing financial hardshipPrivate Consolidation

Getting out of student loan default

The good news is that the credit system is more forgiving about student loan defaults than defaults on other types of debt. If you default on a student loan, you can bring the loan current by making six consecutive payments on time. Once you do so, the lender must remove any missed payments from your credit history. It’s effectively like you made the payments on time and never missed any – at least for your credit.

The U.S. Department of Education also has another option for borrowers with federal student loans. The Fresh Start program is a temporary relief measure that can quickly reverse credit damage caused by defaulted loans, reinstate eligibility for income-driven payment plans and other government financial assistance, and offer other short-term payment assistance. The enrollment period is limited, however, and expires August 2024.

After getting out of default, make sure to review your credit report to make sure past negative remarks have been removed. Note that any interest charges and fees added after default will still apply and you’ll still be on the hook for paying those. 

FAQ’s for borrowers who can’t pay their student loans

Q:

I can’t pay my student loans. What should I do?

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Contact your loan servicer immediately. The first instinct is often to hide from a lender when you can’t pay, but that’s the exact opposite of what you should do. They’ll be less likely to work with you if you do eventually reach out, and won’t twice about sending your loan to collections.

Calling your lender gives you the ability to discuss options that will keep you out of default and avoid credit damage. You can see if you qualify for deferment or forbearance. If the loan is a federal loan, they are also required by law to provide options for repayment plans designed for financial hardship. But you usually must ask to get the information you need.

So, don’t hide. Call your lender at the first sign of trouble and see what you can work out.

Q:

Will it hurt my credit score if I can’t pay my student loans?

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Not necessarily. It does not hurt your credit score when you don’t make payments during an approved deferment or forbearance period. If you qualify to reduce your payments to $0 on PayE or the SAVE plan because you fall below the Federal Poverty Line in your state for your family size, then it won’t damage your credit either.

Basically, as long as the lender has agreed you don’t have to pay anything, it won’t create negative remarks in your payment history. Nonpayment only hurts your credit score when the lender reports a missed payment to the credit bureaus. That only happens if you don’t talk to your lender to make arrangements ahead of time. Again, always talk to your loan servicer before missing payments.

Q:

Why can’t I pay my student loans with a credit card?

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The IRS allows you to pay them with a credit card, but this doesn’t work with student loans. Student loans have special rules, so the debt tends to be kept separate and treated uniquely. Most student loan servicers will not allow you to use a credit card to make a payment because the servicer (and the federal government) does not want borrowers converting student loan debt to personal debt.

Or to be more precise, they don’t want you to convert the debt and then declare bankruptcy. Student loans are not easily discharged during bankruptcy – you must prove that non-discharge would cause you continued and extreme financial hardship. By contrast, credit card debt is fairly easily discharged during bankruptcy. So, paying off student loans with credit cards seems like a bait and switch that could lead to bankruptcy fraud. Thus, most lenders won’t let you use credit cards to pay off your loans.

Crushed by student loan debt and worried you’ll never pay it off? There is help available.

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