The student loan debt burden is one that many Americans carry today. As of the first quarter of 2023, the Federal Reserve Bank of St. Louis reports a staggering $1.77 trillion in outstanding student loan debt in the United States. This isn’t just a statistic; it’s a financial reality for millions of individuals striving to secure their education and future.
You might be tempted to brush aside your student loan debt, but this can lead to severe consequences. Failure to pay back a student loan in many ways has consequences similar to failing to pay off a credit card. However, it has one crucial difference – the involvement of the federal government, which possesses powers that debt collectors can only dream of.
Before we dive deeper into the repercussions of not paying your student loans, it’s important to understand that there are federal student loan assistance programs designed to help you manage your debt before it falls into default. Communicating with your lender about potential repayment issues is a crucial step.
Now, let’s explore what happens if you ignore your student loan payments:
First, You’re Considered Delinquent
Whenever your 90-day student loan payment is due overdue, it officially becomes delinquent. This information is reported to all three major credit bureaus, and your credit rating takes a hit. This drop in your credit score can affect various aspects of your life.
That means any new applications for credit may be denied or offered only at higher interest rates typically reserved for risky borrowers. A tarnished credit rating can ripple into other areas of your life as well. Potential employers often check applicants’ credit ratings as a measure of their character.
The Account Is in Default
Now, let’s fast forward to a more critical stage: when your payment is 270 days late, your student loan officially falls into default. At this point, the financial institution that you owe the money to will refer your account to a collection agency. These debt collectors will make vigorous attempts to collect the outstanding debt, and they may add fees to cover their collection efforts.
What You Can Do
The good news is that you can avoid these dire consequences, but it requires action before your loan falls into default. Several federal programs exist to help borrowers manage their student loans, and they are available to anyone with federal student loans, such as Stafford or Grad PLUS loans.
Three notable programs—Income-Based Pay As You Earn (PAYE), Repayment, Revised Pay As You Earn (REPAYE), and IBR)—aim to reduce loan payments based on your income and family size. The government might even subsidize part of the interest on your loan and eventually forgive any remaining debt after consistent payments over a set period, typically 20 to 25 years.
The New SAVE Program
As of June 30, 2023, President Biden announced a new income-driven repayment (IDR) plan known as SAVE. This plan comes with several enhancements, including forgiving student loans with an original principal amount of $12,000 or less after just ten years of payments—half the time compared to previous programs.
Surprisingly, there is a silver lining to the cloud of student debt. If you diligently make your payments, your credit score will improve over time. This solid credit history can be invaluable when you’re a young adult looking to secure your first car loan or a mortgage.
While it’s essential to stay on top of your student loan payments, it’s equally crucial to remember that there are legal limits to debt collection. In extreme cases, individuals have faced severe consequences, but such scenarios are relatively rare.
Do Student Loans Go Away After 7 Years?
In most cases, defaulted student loans are removed from your credit report after seven years, similar to other defaulted loans. However, this primarily applies to private student loans. It’s crucial to remember that the debt itself doesn’t disappear, and if it’s transferred, it may reappear on your credit report.
Can Your Home Be Taken if Student Loans Are Unpaid?
No, outstanding student debts do not lead to the seizure of your possessions. Student loans lack legally sizable collateral since they are unsecured. A bank would need to successfully prosecute you in order to confiscate your assets for private debts. Your income or tax returns may be withheld in the case of federal loans, but property confiscation is not an option.
Do Mortgage Lenders Look at Student Loans?
Yes, they do. When assessing your creditworthiness, mortgage lenders take into account all your outstanding debt, including student loans.
The Bottom Line
Both the government and banks have a vested interest in helping people facing challenges with their student loans. They are eager to receive your loan payments just as you are to repay your debt.
In a world where education is an essential stepping stone towards a brighter future, student loans are a double-edged sword. They grant access to knowledge and opportunities but also come with the weight of financial responsibility.
Ignoring your student loan debt can lead to a cascade of consequences, from damaged credit scores to the involvement of collection agencies and even potential legal actions. It’s a path best avoided.