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.
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.