- Federal student loans are tightly regulated under law, with serious penalties for those who don’t pay.
- So what happens when you stop paying back student loans? When a loan goes into default, borrowers may be blocked from buying a house, and the loans may not be resolved under bankruptcy.
- Before a loan goes into default, borrowers have several options to prevent a negative credit impact, including requesting a different payment plan, asking for a forbearance, or refinancing loans.
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If you have dreams of getting reward-earning credit cards, contributing to a retirement account, or even buying a home, it’s important to pay off student loans. Otherwise, the US government can step in to ensure your financial options are very limited.
What happens if you stop paying back student loans?
Should you decide that your federal student loans really don’t take much priority, you may want to think again. The US Department of Education can find ways to compel you to pay them, ranging from taking them out of your paycheck to stopping your purchasing power.
Under federal law, a student loan becomes delinquent once the first payment is missed. Comparatively, a delinquent loan isn’t a bad thing: Borrowers still have time to either catch up on their loans, or make arrangements to reduce or skip payments. Once a student loan is delinquent for 90 days, it will be reported as a negative to the three major credit bureaus, which can reduce your credit score and make it difficult to get new lines of credit.
If a federal student loan remains in delinquency for 270 days — approximately nine months — it goes into default. Once it hits this status, the entire balance of the loan becomes due immediately and the government has nearly unlimited power to collect the outstanding money.
In default, the government can withhold any annual tax refunds you may be due to collect, as well as garnish a portion of wages earned at a job. To make matters worse, those who hit default can be permanently banned from qualifying for another student loan.
Borrowers in default can forget buying a house: If your loan hits that low, you won’t be able to purchase any real estate.
Student loans that go into default will also be reported to all three credit bureaus. As a result, your credit score will decrease — meaning it will become more difficult to get credit cards or other lines of credit until the debt is resolved. And unless you meet certain criteria, you may not be able to resolve your loan in bankruptcy.
Finally, under federal law, defaulted loans can be turned over to the US Department of Justice for resolution in court. Although you can’t be arrested for not paying a student loan, you could be responsible for paying any additional court or attorney fees as a result.
Negative marks like a loan default can have similar effects to a bankruptcy. The negative reports can stay on a credit report for up to seven years after the debt has been resolved, haunting you for many years to come.
If you need a break, you can request deferment or forbearance
Before a student loan goes into default, there are several steps borrowers can take to ensure they don’t get hit with a host of penalties for years to come.
First off, borrowers can change their repayment plan to an affordable payment option. With the Pay As You Earn loan repayment plans, borrowers can pay 10% of their earnings, with payments going down to as little as $0 during periods of unemployment or underemployment.
Another option includes requesting a forbearance or deferment of payment plans. Through a forbearance, you can delay your payments for up to a year due to a personal hardship. Although it adds more time to repaying a student loan, it is overall better than letting a loan go into default.
If no other options are available, borrowers also have the option of refinancing their loans through a private lender like SoFi, or compare rates from multiple lenders through a comparison site like Credible. While a refinance can offer a lower plan, it can also add more interest in the long run. Before going through with a refinance, carefully weigh the options to make sure you won’t be paying even more money in the long run.
While these options can help relieve the stress of repaying loans, you still can’t get out of paying them entirely. If you owe money on a federal student loan, your future financial health depends on finding the best way to repay them over time.
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