What Happens When You Don’t Pay Your Federal Student Loans?
Student debt relief has helped millions of Americans during the pandemic. As of March 27, 2020, federal interest rates on student loans have been set at 0% and payments have been suspended.
But the policy will currently expire on October 1, 2021, and many borrowers are still struggling financially, leaving many wondering: what if I can’t repay my student loan?
Private student loans do not have federal protections and have specific contracts that dictate the consequences of missing a payment. However, the consequences of non-payment of federal student loans often follow a common pattern.
Here’s a step-by-step guide to what happens when a borrower misses a federal student loan payment:
Federal student loans are repaid when a borrower graduates or leaves school. However, most federal student loan borrowers have a grace period.
Borrowers on Directly Subsidized, Non-Directly Subsidized, or Federal Family Education Loans have a six-month grace period before they begin making payments.
Borrowers with Perkins loans are granted a nine-month grace period.
After the grace period, borrowers are expected to make regular payments in accordance with their chosen repayment plan.
15 days after payment is due
Persis Yu, director of the NCLC’s Student Loan Assistance Project, says most federal student loans give borrowers a grace period of about 15 days after their normal due date to make a payment. This means that if you are less than 15 days late in making a federal student loan payment, there will likely be little consequence.
However, if a borrower has not made a payment after the end of this window, their loans will be considered past due and may start to impact borrowers’ credit scores, which can have significant consequences in the long run. term such as making it more difficult to buy a car or a home. Bad credit can also impact job opportunities when an employer performs a credit check.
“But at this point you still have time to get back on your feet. You can always make a payment and get back on track, “Yu said.” Really, really bad things don’t start happening until a little later. “
270 days after payment is due
After 270 days, the federal student loans are in arrears. Once federal student debt is in default, the government is able to garnish borrower salaries, Social Security checks, federal tax refunds, and disability benefits. In some states, borrowers with past due student loans may have their business license revoked along with their driver’s license.
“Private lenders have to get a court order before they can garnish your paycheck. The Department of Education is not obligated to do this, ”says Ashley Harrington, Federal Director of Advocacy and Senior Counsel at the Center for Responsible Lending. “All they need to do is send you a notice 30 days before the garnishment begins and give you the opportunity to appeal.”
“The government has extraordinary collection powers under the auspices of the Debt Collection Improvement Act,” says Yu, listing all the different ways the federal government can collect missed student loan repayments. “The most common collection activity is that people will have tax refunds seized. When Social Security benefits or wages are garnished, they’ll typically take about 15% of those payments, but for tax refunds, they’ll actually grab the full amount. “
She adds that garnishing tax refunds, like the earned income tax credit, can have a detrimental effect on families and children.
“A lot of research has been done to show that the earned income tax credit is the most effective anti-poverty measure we have in this country,” Yu says. “And so, the impacts of taking of that money is actually intergenerational. “
Yu adds that default borrowers “can apply for what is called a” 270 day forbearance “in which you can retroactively erase [the delinquency]. You must contact your service agent and you must complete a specific form. “
One year after payment is due
If a borrower hasn’t made a payment for more than a year, federal student loans will often transfer to a collection agency by default, Harrington says.
The Department of Education works with third-party collection agencies that will charge penalties and fees for non-payment, sometimes up to 18% of your loan balance.
Collection agencies “harass people with calls and texts, which can add to the mental stress of debt,” says Harrington, noting that at that time, the impact of default on a borrower’s credit would be. important. “Default loans impact your credit score, can limit access to credit, and make credit more expensive overall. This makes your life even more difficult.”
At this point, Harrington recommends borrowers contact their managing agents to see if they qualify for deferral of economic hardship or if they can switch to a repayment plan that works best for them so they can get back on track. . But ultimately, she says some borrowers have their hands tied.
“Failure to pay your federal student loans and going bankrupt and in arrears can have truly dire consequences. Consequences that can make your life more difficult in many ways and we need to be clear about that, ”says Harrington. “But it’s also important to note that a lot of people are really struggling and student loan repayments are one of them. Some do not make the decision not to pay their debts, but they have many other commitments: they have to pay rent, we are in a pandemic, there are job losses, there is underemployment, there are child care needs, there are all these other things that student borrowers have to deal with.
“And they have to keep the lights on.”
“One of the things that is really unique about federal student loans is that there is no limitation period,” Yu says. The consequences can therefore last a very long time. ”
Fortunately, unlike some private student loans, federal student loans are repaid upon death.