Student loan debt has reached an all-time high and grads are facing an uphill battle to pay it down. Faced with high unemployment rates and low wages, borrowers are increasingly finding themselves pinched for cash. As a result, default rates have spiked in recent years.

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The federal government has stepped up its efforts to make repaying student loans easier by offering income-based options but they’re not a perfect solution. In situations where grads are staring down six figures in debt, the prospect of digging out is overwhelming. Simply walking away may seem appealing but doing so only creates a host of new problems. If you’re currently having a tough time repaying your student debt and have stopped paying, here’s what you can expect. Remember, there are options for grads who are facing financial hardships.

The debt keeps growing

Just because you stop making payments on your loans doesn’t mean the interest stops accruing. Even if your loans are tied to a very low rate, the balance can quickly balloon, landing you even deeper in debt. Your lender may also tack on collection costs and late fees, which can be as high as 25 percent of the outstanding balance.

If you decide to try and make good on the loans at some point, you may be in for a nasty surprise if what you owe has doubled or even tripled. When you can’t make the full payment each month, paying as much as you can towards the interest can help keep the balance at bay.

Your credit will take a hit

Whether you took out federal or private student loans, your account activity is reported to the credit bureaus just the same as any other type of loan. That means that if you make late payments or you miss a payment altogether, you can expect it to show up on your credit history. For every payment you skip out on, you’ll rack up another negative remark on your report.

Thirty-five percent of your FICO credit score is based on your payment history. When your student loan accounts become delinquent, you’ll see your score drop dramatically. Negative information can stay on your report for up to seven years which can be a major obstacle if you’re trying to qualify for a credit card, buy a car or secure a mortgage loan. Some employers also take your credit history into account during the hiring process and if you’ve defaulted on your loans, it could be a roadblock to career advancement.

Loan rehabilitation can help to minimize some of the damage to your credit if you’ve gone into default. Rehabilitating your loan involves negotiating a reasonable payment plan with your lender and making nine on-time payments in a 10-month period. Once you do so, your regular monthly payments resume and you can ask your lender to remove the default status from your credit report.

Lenders won’t just forget about it

When you take out a student loan, you’re entering into a legally binding agreement to pay it back and if you break your promise, lenders aren’t likely to be forgiving. In the early stages of collections, you’ll likely be subjected to repeated phone calls or written requests to pay up. If you ignore them, more serious collection actions may follow. Staying in touch with your lender and researching your payment options can help you to head off collection actions before they become a problem.

Some of the things that lenders can do to delinquent borrowers include garnishing your wages, seizing your federal tax refunds, making a claim against any federal benefits you’re receiving, such as Social Security, or filing a lawsuit against you. Lawsuits aren’t as common but since there’s no statute of limitations on collecting federal student loans, you shouldn’t rule it out.

When you default on a private loan, the lender has to take you to court to enforce a collection action such as a wage garnishment or seizure of your bank account. Lenders can also try to put a lien on any real property you own if a wage or bank account garnishment doesn’t satisfy the judgment in full. If your parents co-signed the loans with you, they may also be targeted with these same collection actions and their credit will suffer the same damage.

What to do if you can’t pay

If you’re struggling to keep up with your student loan payments, there are several options for keeping the situation under control. First, you can contact your lender to see if you qualify for a forbearance or deferment. With a deferment, your payments are suspended for a set period of time and no interest accrues. If you’re not eligible for a deferment, forbearance gives you a temporary break from paying but the interest will continue to add up.

The next step is to look into your repayment options. If you took out federal loans, there are several income-based plans available that will lower your monthly payment according to what you make. These plans also give you more time to pay but there is a catch, since you’ll typically end up shelling out more in interest over the long run.

Finally, you can check into refinancing or consolidating your private or federal loans. Doing so can relieve some of the financial burden by reducing your interest rate and lowering your monthly payments. The more affordable you can make your loans, the less you have to worry about the possibility of default. Otherwise, you risk finding out what happens if you don’t pay student loans the hard way.

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  • madlynx

    This is absolutely outrageous.

    #1: EDUCATION SHOULD BE A RIGHT, NOT A LUXURY! That’s the way it is in most countries in the world. In France, for example, you don’t get into a top school because your parents are rich, you get there because you’ve got the best grades. Plus, you have to study really hard so you can stay in those schools. Otherwise, you get transferred to a lower level school. The bottom line: yes, there are a few expensive schools in France, but they suck and everyone knows that. All the best ones are 100% FREE, as they should be: Polytechnic, Les Ponts-et-Chausses, Centrale, Normale Sup, HEC, Science Po, the ENA, Les Beaux Arts, Nat’l Conservatory, etc…(Top schools) and universities (La Sorbonne, Dauphine, etc..) are all free. Even the meals are free. How can a place like NYU charge $60,000/year, and for mediocre education??? Even Public Colleges now are super expensive: City Colleges in NY (CUNY and SUNY) are about $15,000/yr! When I used to tell my friends back in France, they did not believe me, and they never did. Still, it looks like California has a much better and more affordable public school system. If you’re a resident (and you will be), you can go to schools like UCLA and even US Berkeley for much less than anywhere else. In the 90’s, it use to be only 10% of the average tuition at comparable schools elsewhere. I don’t know the prices now.

    #2: BANKS = SATAN. They make billions lending money they don’t even have. When they want more, they can print some just like I could photocopy dollar bills on my copy machine, except it’s legal for them, but not for me. Sounds crazy, but it’s true. When the government needs money, they call a private bank called “the Federal Reserve” and ask them to print some for them. And on top of it all, the govt must pays interest (8%, that’s where your tax money goes…) to borrow it !?!?!? But wait, it gets even better. If major bank screw up, intentionally or not, they have nothing to worry about because the Fed, which they own and control, will bail them out !!!! How can that possibly be tolerated by the people??? It’s the biggest scam EVER! Meanwhile, they throw the country into a recession/depression, people lose their jobs, small businesses go under. No bailout for them. The banks, on the other hand, are breaking records in profits, but at least they are thankful to the people who bailed them out. So they create millions of new jobs and give out interest-free loans to everyone in need, right? Right! We still get 0.1% for what we lend them, risk free (for them), but sorry, gotta keep those high interest rates for you. So everyone sinks deeper and deeper into debt until they can’t even afford to pay the interest and penalties on their loan anymore. But banks are understanding. They won’t kill you, that would not be profitable, but they’ll gladly accept your house, everything in it, and your car to pay the bill. So all you have to do is give them everything you have and you’ll be all set! SICK!!!

    My advice to young Americans who want a good education and as little debt as possible when they come out is to go to a school in a foreign country. Not only are they better, but in most cases they will be free. Plus you’ll become bilingual which is a huge asset (if you feel more comfortable with English, there are plenty of English speaking countries in the world, incl. the UK, Ireland, Australia, New Zealand, South Africa, India, etc… I just don’t know which ones, if any, offer free education). You’ll have a few extra expenses, like plane tickets and lodging. BTW, if you’re a student in France, you cannot be charged more than a certain amount for rent (low). You won’t believe how much financial help you can get from the govt there. Last time I heard the French news, the president had implemented a new program for students living far from school to get a free car (temporarily I imagine but still…). You should try to go to an international HS in the US first to get acquainted with the language (unless it’s English) and because the work load is much heavier. Good luck.