Federal Student Loans: What Happens If You Don’t Pay?
Student loan law right now is kind of a mess, to be perfectly honest. There is a lot of student loan debt out there. Total student loan debt right now is around $1.5 trillion. 44 million borrowers have student loans, and upwards of 70% of students graduating from college are graduating in debt.
The loan program makes loans to all undergraduates, regardless of the program that they study, regardless of their income background, and regardless of whether or not they’re likely to complete their program, and at two-year colleges, at community colleges, and at four-year colleges.
So, it’s not surprising then that if you don’t have any criteria on the front end to screen out people who are unlikely to pay, then you end up with default rates that are somewhere around 20%, 25%. A four-year graduate would typically leave college with around $30,000 in debt, depending on their circumstances. The federal government doesn’t charge you late fees if you miss a payment on your student loan.
They will continue to charge you interest on the loan, and if you go long enough without making payments, several months, it can affect your credit score. So, if you start falling behind on your payments, you enter a type of status called delinquency.
For federal student loans, borrowers can miss up to nine payments or essentially be 270 days past due before the loan actually goes into default status. It triggers something called acceleration where the full balance of the loan becomes due all at once, and that then gives the federal lenders more opportunities to pursue borrowers. About one in five are in default, and that equates to … It’s about 8.3 million people who are in default on a federal student loan.
A 25% default rate, that sounds like a catastrophic number. That’s the kind of number you would associate with, uh, a severe economic recession. So, for borrowers who default on federal student loans, the consequences can be pretty severe.
For federal student loans that go into collections, uh, federal law allows for massive collections cost and penalties that can be upwards of 25% of the outstanding principal and interest balance, meaning that if you have $40,000 in federal student loans and they go into default, that balance can go up to $50,000 as a result of the default. The federal government has additional collection powers that private entities don’t have.
So, the federal government can garnish your wages without a court order. They tend to do this as a last resort, but it’s actually done quite commonly. The federal government collects around $600 million a year through wage garnishing on defaulted federal student loans.
It is difficult to discharge student loan debt in bankruptcy because the bankruptcy code was rewritten to largely bar borrowers with student loans from discharging those loans. It requires something called an adversary proceeding, which is essentially like a trial in bankruptcy court, in order to show that the borrower meets the undue hardship standard. A lot of borrowers are not able to meet that standard.
And the reason why Congress prevents you from discharging your loans in bankruptcy is that there’s no underwriting on the front end for the loans. So, the government makes loans to anybody and everybody, and so if you combined it with, uh, easy discharge ability for bankruptcy on the back end would be a program that’s ripe for abuse.
I think that, uh, that the system is unsustainable. We need to make reforms that allow borrowers, uh … or I should say allow students to go to school without needing to borrow, or at least not needing to borrow as much. I also think that we need to strengthen programs for borrowers that are already in repayment so that they can have an easier time dealing with their loans without having to wade through a- a messy servicing and debt collection system.
I think people need to be more careful in the amount that they borrow, in the amount that they’re going to pay off. I think there are concerns about some of the potential costs of these programs, particularly if the cost of education continues to go up and borrowing is allowed to keep pace with the cost of education, uh, and more and more borrowers are able to get their loans forgiven.
At the same time, without some sort of reforms on the other side, on the cost side, just eliminating these safety net programs might cause a lot of lower-income borrowers to not be able to reasonably access higher education at all.
Is it worth it to go into debt to- to pay for the education? I wouldn’t necessarily be turned off by having to go $30,000 in debt. If that’s the difference between getting an undergraduate degree and not getting an undergraduate degree, um, then generally $30,000 is definitely worth it.
Can you go to jail for not paying student loans?
I wanted to talk to you about what happens if you can’t pay your student loans. Many of us are so busy complaining about our student loan payments, we never acknowledge that some people actually can’t make them, and the stress that really weighs on your shoulders if your loans go into default and the consequences thereof. Truthfully, up to 40% of student loan borrowers are not making payments.
This means they’re either participating in some kind of student loan repayment relief program or their loans are actually in default and hurting their credit. I don’t want you to get into this position where you’re missing payments and it’s harming your long-term financial health. I have some suggestions of what to do if you can’t make your student loan payments. The first thing to do is to notify your creditor immediately.
If you know that you’re not going to be able to make your student loan payment this month or next month, call them and tell them. This is really important so that they can work with you.
Student loans are no different, but they’re way more important than other consumer credit vehicles that you might be using. This is because student loans cannot be discharged in bankruptcy. Even if you’re really struggling to make these payments, they’re never going to go away. So it’s way better to just find a way to deal with it rather than put your credit at risk by not making payments.
The reason it’s so important to let your creditor know that you might be missing an upcoming payment is that sometimes missing a series of payments will disqualify you from seeking student loan relief options. So make sure you let them know so you don’t take any of your future opportunities off the table to find a way to pay off these debts. Once you’ve notified your creditor that you’re going to miss a payment, they’ll probably come up with some solutions to help you out. One of these is student loan repayment assistance. In Canada, if you’re single and earning less than $25,000 per year and have no dependents, you don’t need to make payments on your student loans.
The government will give you a six-month relief period where you don’t have to make any payments on your student loan debt and you can use this time to focus on increasing your income and managing your other financial obligations to get back on track.
Enrollment in this program is not automatic, which is why it’s so important to contact your creditor either by phone or online to fill out the necessary application in order to get the student loan repayment assistance. Furthermore, re-enrollment is not automatic. So if at the end of 6 months, you still can’t make your student loan payment, it’s really important that you reapply.
Even though you’re not required to make student loan payments during the time that your student loans are in repayment assistance, they will still be accruing interest. So it’s really expensive to ignore them. You definitely don’t want to leave it like this for the long term but it is a great option if in the short term you’re really struggling financially. In the US, one of the options available to you, if you can’t make your student loan payments, is deferment.
This works similarly to the repayment assistance program in Canada where you don’t have to make payments for a certain period of time if you qualify. Some of the qualifications are either you’re returning to school, you’re unemployed, or you have a disability that prevents you from earning the money necessary to make your student loan payments.
If you don’t qualify for a deferment, one of your other options is student loan forbearance. And this works exactly like the Canadian repayment assistance programs where you won’t have to make student loan payments for a certain period of time due to financial hardship.
These are typically granted one year at a time, so that can give you 12 months of student loan repayment relief if you’re really struggling financially. Finally, one of the options that many people don’t explore fully is student loan forgiveness and there are certain instances in both the US and Canada when this is available for large student loan balances. Sometimes student loan forgiveness is tied to a certain profession or working in a certain geographical area. For example, in Canada, medical professionals like doctors or nurses can receive student loan forgiveness if they work in a rural community.
In the United States, the public service student loan forgiveness program is in place to forgive your student loan balances if you work in public service for a number of years. Student loan forgiveness is extremely rare so if you qualify for one of these options definitely take advantage. It’s important to remember that if you’re unable to make it payments on your student loans you’re definitely not alone so don’t feel embarrassed by your struggle.
There are options available to help you, all you need to do is reach out to your creditor and learn what’s available and start taking steps now. The most important thing is just that you start taking action before your loans actually go into default and you miss payments because that can negatively impact your credit which takes years to recover from.
Can you go to jail for not paying a loan company?
Don’t go to jail for default: Default is a civil dispute. No criminal charges can be filed against a person for defaulting on a loan. This means that the police cannot simply make arrests.
Can you go to jail for not paying debt in Canada?
The short answer is no – you will not go to jail for failing to pay your back. In Canada, not paying your creditor is not a reason for imprisonment. This does not mean that your debts do not come as a result of non-payment, though.
Can you go to jail for not paying a loan in the Philippines
You cannot go to jail for not paying. No customer debt payer, including credit card, medical debt, salary-loan, mortgage, or student loans, can force you to be arrested, jailed, or in any court-directed community service. If you are sued for unpaid debt, you will end up in civil court.
What happens if you don’t pay an education loan in India
When the loan amount is low, or the borrower does not deposit or require a co-signature – an unsecured education loan can be taken. If this is the case, the payer will first send you a notice if you do not pay the EMIs on time. If you do not respond, the payer will consider you a defaulter.
Can I go to jail for not paying an education loan in the USA?
You cannot go to jail for failing to pay federal student loans or private student loan debt.
Consequences of not paying student loans
As you can see, failure to repay the education loan can lead to several negative consequences like – drop in the credit score, a black mark in the credit report, and losing the pledged property.