If you don’t pay your student loans, they can bring an avalanche of problems. Have a look below to know what happens if you stop paying student loans and how to get out of default if that happens.
What Will Happen if You Don’t Pay Your Student Loan?
Low Credit Score
A credit score is a three-digit number that represents your creditworthiness. It’s calculated based on factors like how much debt you have, whether or not you pay bills on time and how many credit cards or loans you have open. The higher the score, the better it looks to lenders who are considering giving you a loan or line of credit.
Default Notice
The federal government will send you a notice of default if you don’t pay your student loan. The notice will include the amount of money that is past due on your student loan and the interest rate being charged on that debt.
The notice will also explain when your loan went into default, which can happen if you fail to make any monthly payments for 270 days or more.
The notice will include contact information for a representative at the loan servicer (the company that handles billing and collections for creditors).
If you want to work out an arrangement with them, it’s important to get in touch with them as soon as possible so they can help guide you through the process.
Administrative Wage Garnishment
If you’re not already aware of the option, administrative wage garnishment is a tool that can be used to recover delinquent student loans. It’s only available for federal student loans and can only be done if you have not made a payment on your loan in over 6 months.
If your employer is subject to this type of withholding, the government will send them an order telling them how much needs to be deducted from each paycheck.
They will then deduct 15% of your disposable income each pay period until the outstanding balance has been paid off or until another arrangement has been made with your lender (if there are extenuating circumstances).
Tax Refund Offset
If you are a borrower who has defaulted on your student loans, the government may be able to take your tax refund as repayment. This process is called tax refund offset.
The first step in this process is that the Department of Education sends a letter to the IRS requesting that they withhold your tax return until after you’ve made arrangements to repay your debts.
Student Loan Rehabilitation Programs
If rehabilitation programs are not an option, you still have options to help you get out of default. The first is a “partial financial hardship” loan modification, where your monthly payments are reduced based on your income and expenses.
The second option is an alternate repayment plan, which allows you to set up monthly payments that fit within your budget. If either of these options works for you, that’s great! But if they don’t work and all else fails.
As per SoFi experts, “Several options can help you prevent defaulting on your student loans, such as forbearance, deferment, and income-driven repayment plans.”
In the end, if you fail to pay your student loans on time, you’ll be at risk for default. This is a severe financial problem and one that many people face today.
So depending on your debt and where it comes from (credit card companies or other obligations), there are many ways to help yourself get back on track financially.