In the upcoming month, approximately 40 million Americans will resume making payments on their federal student loans after a 3.5-year hiatus.
| Key Takeaways |
|---|
| Student Loan Repayment Restart |
| Federal student loan repayments are resuming for millions of borrowers after a 3.5-year pause. |
| Financial Consequences of Non-Payment |
| Not paying your student loans can lead to severe financial consequences, including interest accrual and missed opportunities for loan forgiveness. |
| 12-Month On-Ramp Period |
| The Biden administration introduced a 12-month “on-ramp” period to help borrowers transition back into payments, during which missed payments won’t affect credit scores. |
| Interest Accrual During On-Ramp |
| Interest will accrue during the on-ramp, increasing your loan balance if payments don’t cover the interest. |
| Missed Progress Towards Loan Forgiveness |
| Skipping payments can delay progress toward loan forgiveness through income-driven repayment plans. |
| Default and Debt Collection |
| Missing payments for an extended period can lead to default, resulting in debt collection efforts, wage garnishment, and other penalties. |
| Advice for Borrowers |
| Experts recommend making affordable payments to avoid severe financial consequences in the long run. |
As the due date approaches, many borrowers are grappling with feelings of frustration and disappointment. This sentiment intensified following the U.S. Supreme Court’s rejection of President Joe Biden’s student loan forgiveness proposal this summer.
On various social media platforms, such as Reddit and X (formerly Twitter), some individuals are considering the option of student loan default. In certain cases, they are even rallying others to join in, aiming to ignite a nationwide student debt strike.
Regardless of the reason, as the impending deadline looms, many are left wondering about the consequences of not repaying their student loans.
According to experts, the financial repercussions could be severe.
“Every now and then, I encounter borrowers who declare, ‘It’s just not worth it. I won’t pay my debt,'” reveals Betsy Mayotte, the founder and president of The Institute of Student Loan Advisors, a nonprofit organization offering free guidance to borrowers.
Mayotte further emphasizes, “What I typically advise them is that refusing to make payments may ultimately prove to be more financially burdensome than responsibly managing the loan.”
What you'll learn:
➤ Do I need to start paying right away?
To facilitate the transition for borrowers returning to student loan payments after a multi-year hiatus, the Biden administration has introduced a 12-month “on-ramp” period, in effect from October 1st to September 30th, 2024.
During this duration, the most severe financial consequences of missing student loan payments are mitigated. The Department of Education will refrain from placing the loans of borrowers who miss payments into default or categorizing them as delinquent.
Additionally, they have committed not to report any missed payments during this period to credit bureaus or debt collection agencies.
In simpler terms, failing to make federal student loan payments through September 2024 will not adversely impact credit scores, as previously explained by Barry Coleman, a vice president at the nonprofit National Foundation for Credit Counseling.
Taking advantage of this leniency, the Debt Collective, a nonprofit debtors’ union advocating for a debt strike, has viewed the on-ramp as a “safe approach” to going on strike and foregoing payments.
However, it’s important to clarify that many individuals misunderstand the on-ramp, cautions Abby Shafroth, the director of the National Consumer Law Center’s student loan borrower assistance project.
“The on-ramp is distinct from the pause,” she emphasizes, highlighting that there are still repercussions for missing payments during this period.
Primarily, experts point out that during the on-ramp, unlike the student loan pause, interest on the loans continues to accrue. This means that loan balances will start to grow if payments aren’t made to cover at least the accruing interest.
For instance, consider a borrower with $38,000 in student debt (the average federal loan balance) at a 4.5% interest rate. If they choose not to make payments for 12 months during the on-ramp, roughly $1,700 worth of interest will accumulate.
When they resume payments, none of their payment will be applied to their principal balance ($38,000) until they’ve settled all the outstanding interest ($1,700).
Furthermore, borrowers who abstain from making payments will forfeit progress toward student loan forgiveness through income-driven repayment plans.
Essentially, these plans function by having borrowers sign up, receive a monthly bill based on an ideally manageable percentage of their income, and after 10 to 25 years of timely payments, any remaining balance is forgiven.
Under President Biden’s new SAVE repayment plan, some loans could be forgiven in as little as 10 years, taking into account past payment history. In some instances, borrowers might even qualify for a monthly “payment” as low as $0.
In essence, abstaining from payments during the on-ramp could result in borrowers being saddled with loans that could have been forgiven sooner.
➤ What happens after the 12-month on-ramp period?
Once the 12-month on-ramp period concludes, the repercussions of missing payments will become much more severe.
Aside from the growing balances due to interest accumulation and the forfeiture of progress towards loan forgiveness, the Department of Education has announced its intention to resume debt collection efforts vigorously after September 2024.
According to Mayotte, if payments are missed for 90 days, the department will begin reporting delinquency to credit bureaus, causing your credit score to decline. After approximately nine months, or 270 days, your loan will enter a state of default.
In the words of Shafroth, “At that juncture, the consequences become significantly more dire.”
When federal student loans are in default, the entire outstanding debt becomes immediately due, along with collections costs that could potentially inflate your balance by up to 24%, as Mayotte explains.
Moreover, the government has the authority to intercept your tax refunds, garnish your wages, and withhold federal benefits such as Social Security. Once you’ve entered default, you are no longer eligible to participate in repayment plans.
When Mayotte underscores that refusing to pay your loans could prove more costly in the long term, she means that if the government garnishes your wages, it typically deducts 15% of your paycheck.
In contrast, borrowers who opt for the new income-driven repayment plan may only have to allocate about 5% of their discretionary income per month.
“If you believe you can’t afford your current payment,” Mayotte cautions, “you will undoubtedly find it even more challenging if wage garnishment comes into play.”
➤ Do I need to make payments during the on-ramp period?
In brief, yes. The on-ramp period is designed to assist individuals who are facing challenges as they transition back into repaying their student loans after a lengthy hiatus.
While missed payments won’t harm your credit during this period, experts strongly recommend that you resume payments if you are financially able to do so.
➤ Will my wages be garnished if I don’t pay my student loan?
There’s a possibility. If you miss a few payments, particularly during the on-ramp phase, you won’t immediately face wage garnishment by the government.
However, if you fail to make loan payments for 270 days, roughly nine months, your loans may enter default, potentially leading to wage garnishment.
➤ Will I lose my car if I default on my student loan?
The likelihood is quite low, especially if you cooperate with the Department of Education or the designated collections agency. Nevertheless, there have been instances where the federal government placed liens on borrowers’ assets following legal action, as reported by NPR.
In such cases, the loan debt becomes associated with valuable assets like cars or houses, which could theoretically be repossessed or subjected to forced sale by the government.
➤ Will I go to jail if I default on my student loan?
Not necessarily. Neglecting to repay your student loans can result in severe financial repercussions. Eventually, your student loans may fall into default, potentially causing you to lose federal loan benefits, experience wage garnishment, and become ineligible for federal student aid, among other consequences.
Additionally, your loan holder may pursue legal action against you. If you disregard court proceedings or court orders, this could potentially lead to legal issues, but it does not directly result in jail time.
