Ibrahim Gardner
Failing to pay back student loans can have serious consequences. These include late fees, a damaged credit score, and deductions from your paycheck. If you default on your loans, your debt could be sold to a collections agency, which may charge you hefty collection fees. Additionally, your professional license could be suspended or revoked, and your driver's license could be taken away. While federal loans never disappear, private student loans fall off your credit report after seven years and are not legally collectible after the statute of limitations is up.
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What You'll Learn
Your credit score will drop
Failing to pay your student loans can have a detrimental effect on your credit score. This is because student loans, like other loans, appear on your credit report. Therefore, they can play a crucial role in building your credit history.
Your credit score is a number calculated based on information in your credit report. It affects the likelihood of approval for loans and credit cards. Lenders use your credit score to determine whether to approve your loan application and under what terms.
Late payments on student loans can stay on your credit report for up to seven years. Even one missed payment can lower your credit score. However, if you are not required to make payments, your loans are reported as in good standing each month, which is positive for your payment history.
Student loans can help you establish credit while also maintaining a higher average credit age until they are paid off. This is because credit scoring models tend to favour active accounts. Once a student loan account is paid and closed, you may see a drop in your credit score due to the decrease in the average age of your active credit accounts. However, this drop is typically temporary.
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You may face late fees
Failing to pay your student loans on time can lead to several consequences, one of which is incurring late fees. Late fees are imposed when payments are not received by the due date, adding to the overall cost of the loan. The late fee is calculated based on the unpaid portion of the regular monthly payment amount. For instance, federal student loans may incur a late fee of up to six cents for each dollar that is overdue, as outlined in the terms of the promissory note.
In addition to late fees, there are other potential repercussions of missing student loan payments. Unpaid interest may be capitalized, increasing the total amount repaid over the loan's life. Late payments can also negatively impact your credit score, making it challenging to secure favourable terms for future credit needs, such as mortgages or new credit cards. Furthermore, collection costs, including attorney fees and court costs, may be added to the loan balance if the account is handed over to a collection agency.
It is important to prioritize loan payments in your budget and stay in communication with your loan servicer to avoid late fees and other penalties. If you are facing financial hardships, explore options like deferment or forbearance to temporarily halt payments. Federal student loan borrowers may also benefit from enrolling in AutoPay, which offers a 0.025% discount on the interest rate.
While it may be challenging to keep up with student loan payments, especially during difficult financial times, taking proactive measures and understanding your options can help mitigate the risk of incurring late fees and other penalties associated with missed payments.
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Debt collectors may be employed
If you are unable to pay your student loans, it is important to contact your loan servicer as soon as possible to discuss your options. Federal student loans may be eligible for deferment, forbearance, or income-driven repayment plans. Private student loans do not have standard options to lower monthly payments, but some lenders may offer modified repayment plans.
However, if you do not make your student loan payments, there can be serious consequences, including late fees and credit score damage. If your loan goes into default, debt collectors may be employed. Here is what you need to know:
Debt collectors are agencies that specialize in recovering unpaid debts. When your defaulted loan is sold to a debt collection agency, they become the new owner of your debt. This means that you will be dealing directly with the collection agency, not your original lender, to resolve the debt. Debt collectors are known for their persistent attempts to collect payment, and they may employ various tactics to do so. These can include frequent phone calls, emails, letters, and even in-person visits.
The fees charged by debt collectors can be significant. For federal loans, collection fees can reach up to 18.5% of your loan balance, while for private loans, these fees can be even higher. Additionally, debt collectors may report the unpaid debt to the credit bureaus, further damaging your credit score. This can make it more challenging and costly to borrow money in the future, impacting your ability to take out loans, mortgages, or credit cards.
In some cases, debt collectors may attempt to secure a court order to garnish your wages, meaning they can take a portion of your income directly from your paycheck to repay the debt. They may also seek to place liens on your property or take possession of your tax returns. These actions can have significant financial implications and affect your ability to maintain your standard of living.
It is important to remember that debt collectors must operate within the boundaries of the law. They are regulated by the Fair Debt Collection Practices Act (FDCPA), which outlines their rights and limitations in the debt collection process. This includes restrictions on the times they can call, the people they can contact, and the methods they can use to collect the debt. Understanding your rights under the FDCPA can help you effectively navigate interactions with debt collectors.
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Your wages may be garnished
If you default on your student loan payments, your wages may be garnished. Wage garnishment is a serious issue, and it occurs when your employer is required to withhold a portion of your pay and send it to your loan holder to repay your defaulted loan. The garnishment will remain in place until your loan is paid in full or you work with the lender to get out of default.
The wage garnishment process can be extensive, and there are multiple ways to avoid it. If you receive a wage garnishment notice, you have the right to request a hearing within 30 days of the notice. During the hearing, you may be able to avoid wage garnishment or reduce the amount garnished if you can demonstrate that it will cause extreme financial hardship, such as an inability to pay rent or mortgage. You can also negotiate a new repayment plan with your lender or loan servicer to potentially avoid wage garnishment.
If you are at risk of falling behind on your payments, contact your loan servicer to discuss alternative payment plans or loan restructuring. Some private lenders offer alternative payment plans for borrowers facing financial difficulties, such as job loss. With federal student loans, you may be eligible for income-driven repayment (IDR) plans, where payments are based on a percentage of your discretionary income. In some cases, borrowers may qualify for $0 payments.
Additionally, consider refinancing your student loans to obtain a lower interest rate and more manageable monthly payments. However, if you refinance federal loans with a private lender, you may lose access to certain protections, such as deferment, forbearance, and income-driven repayment plans.
It is important to prioritize repaying your student loans and explore all available options to avoid wage garnishment, as it can significantly impact your financial situation.
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You could lose your professional license
Defaulting on your student loans can have serious consequences, including the loss of your professional license. This means that if you fall behind on your loan payments, the government can seize your state-issued professional license, making it difficult or even impossible for you to continue working in your chosen field. This can obviously have a significant impact on your career and financial situation.
The impact of license suspension or revocation can be severe. For example, in one state with an acute nursing shortage, Louisiana, the statewide nursing board notified 87 nurses that their defaulted student loans would bar the renewal of their licenses in 2017. This resulted in three nurses losing their ability to work in the medical field. Tennessee has also been particularly aggressive in enforcing license revocation for unpaid student loans, with over 5,400 people reported to the state's professional licensing agencies from 2002 to 2017.
The professions impacted by license suspension or revocation due to unpaid student loans vary but can include firefighters, nurses, teachers, lawyers, massage therapists, barbers, psychologists, and real estate brokers. Even hunting and fishing licenses have been blocked or nullified in some states, such as South Dakota and Iowa.
It's important to note that the enforcement of these laws varies across states, with some states repealing their provisions in recent years. For example, Montana, Oklahoma, and New Jersey repealed their provisions in 2015 and 2016, respectively. Additionally, multiple bills have been introduced in Tennessee's legislature to repeal their law. However, other states, such as Louisiana, Tennessee, and Texas, are considered more aggressive enforcers.
If you are struggling to make your student loan payments, it's crucial to take action as soon as possible. You can reach out to your loan servicer or a nonprofit credit counselor to discuss your options and try to work out a repayment plan. By taking proactive steps, you may be able to obtain or renew your professional license and avoid further complications.
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