If student loan repayment seems all but impossible, it can be tempting to just pretend those loans don't exist. Here's what will happen if you do.
This post comes from Gerri Detweiler at partner site Credit.com.
By some estimates, nearly 1 in 3 student loan borrowers in repayment are behind on their payments. Some of those borrowers may be paying as much as they can, when they can, but others may feel their debt is hopeless and are taking the ostrich approach instead.
Others, like Credit.com blog reader Laurie, aren’t even sure about the status of their loans. She wrote: “I am working toward my master’s and the loans I have used are deferred. I took one year off school and didn’t realize I was delinquent on my loans.”
“Ignoring your debt only makes it worse,” may sound cliche, but when it comes to these loans in particular, there is truth in that adage. Student loans don’t just go away, and the consequences of making no attempt to pay or resolve them can be severe.
But what does happen if you ignore your student loans?
You’ll get deeper in debt. Interest will continue to accrue and your balances that seem so daunting now will get even larger. Loans that go to collections will incur additional collection costs of up to 25 percent. Ouch! (State law may limit collection costs.)
Your credit scores will suffer. Late payments will appear on your credit reports and your credit scores will go down. Negative information may be reported for up to seven years, and for many graduates their credit scores are more important than their college GPAs when it comes to real life.
You will eventually go into default. Most federal loans are considered to be in default when a payment has not been made for 270 days. Once you are in default, the government has “extraordinary powers” to collect, as we’ll describe in a moment.
Private student loans are a bit different, though. The definition of “default” depends on the contract, and may include simply missing one payment or the death of a co-borrower. Private loan lenders don’t have the same collection powers as the federal government but they can sue the borrower, and if they are successful, then use whatever means available under state law to collect the judgment.
“When it comes to private student loan debt, the one axiom people need to remember is doing nothing will generally leave you really, really screwed,” says Steve Rhode, founder of GetOutofDebt.org.
You may have to kiss your tax refund goodbye. Expecting a tax refund? If you have a federal student loan in default, the federal government may intercept it. Married filing jointly? Your spouse’s portion of the refund may be at risk too, and they may have to file an injured spouse claim to recover it after the fact. (Private student loan lenders cannot intercept tax refunds.)
Your wages may be garnished. Normally, a creditor must successfully sue you in court in order to garnish your wages, and even if they are successful, there may be state limits on whether and how much income can be taken. But if you are in default with a federal student loan, the government may garnish up to 15 percent of your disposable pay. You may be able to challenge the garnishment under certain circumstances, but in the meantime, do you really want your employer to know you are in serious trouble with your loans?
Any co-borrowers are in as much trouble as you are. Anyone who co-signed a student loan for you is on the hook 100 percent for the balance. It doesn’t matter if it was your 80-year-old grandmother who co-signed for you; she is going to be pressured to pay and may be at risk for the same consequences you face.
You may be sued. Lawsuits are less common with federal loans than with private ones. (After all, why would the government sue when it has so many other ways to collect?) But a lawsuit is always a possibility, especially if you ignore your student loans. If you are sued, you may find you need the help of an attorney experienced in student loan law to raise a defense against the lawsuit.
You’ll be haunted by this debt until you die. It may sound blunt, but it’s the reality. Student loan debt will not go away if you ignore it. There is no statute of limitations on federal loans, which means there is no limit on how long you can be sued. State statutes of limitations do apply to private student loans, however, limiting the amount of time they have to sue to collect. But it doesn’t stop them from trying to collect from you — and if you don’t know your rights it may go on indefinitely.
“The biggest tragedy is all of that could be easily avoided by enrolling in one of the government programs to help people repay debt,” says Rhode. He is referring to programs available for federal loans such as Income-based Repayment that allow some borrowers to qualify for a lower monthly payment based on income, and then discharge the remaining balance after a certain number of years of repayment.
But what if you can’t afford to pay?
If you’re now convinced that you can’t ignore your loans, but you also are afraid because you don’t think you can afford to pay them, what can you do? For starters, get your free annual credit reports so you can see which loans are being reported by whom. Then get your free credit score using a service like Credit.com so you have a clear understanding of how this debt is affecting your credit. You can also use the National Student Loan Database to track down your loans.
For federal loans, you can get back on track with a reasonable and affordable payment plan. Start the process at StudentLoans.gov. (Be careful if you talk with a collector or servicer about your options. Some provide borrowers with accurate information, but some do not.) Here’s a guide to options for paying off student loans.
For private loans, Rhode recommends you talk with an attorney who understands how to discharge certain private student loans in bankruptcy. It can be tough to qualify, but not impossible. If that’s not an option, you may be able to try to negotiate a settlement.
While it’s never a good idea to ignore loans, there are times when a borrower simply cannot afford his or her loan payments. That’s especially true in the case of private loans, which don’t offer the same flexible options as federal ones.
“If you can’t pay, you can’t pay,” says attorney Joshua Cohen, who is known as The Student Loan Lawyer. “Your living expenses are more important than your private loans, and your federal loans are more important than your private loans,” he says. “It is important to prioritize.”
More from Credit.com:
- Can You Get Your Student Loans Forgiven?
- Strategies For Paying Off Student Loan Debt
- How To Consolidate Student Loans