The worst things that can happen if you don’t pay your student loans

10 tips to reduce debt #unindebted (october 2022)

The worst things that can happen if you don't pay your student loans

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If you default on your student loan, you're unlikely to find a team of armed U.S. Marshals at your doorstep, as one texas man recently did. But it's still a very bad idea to ignore this debt.

In most cases, defaulting on a student loan has exactly the same consequences as defaulting on a credit card. But in one respect, it can be much worse. Most student loans are guaranteed by the federal government, and government officials have powers that debt brokers can only dream about. It probably won't be as bad as armed marshals at the door, but it could be very uncomfortable.

First you are 'delinquent'

If your loan payment is 90 days past due, it's officially "delinquent". "This fact is reported to all three major credit bureaus. Your credit score will be reached.

This means that new loan applications may be denied or granted only at the higher interest rates available to high-risk borrowers. A bad credit score can follow you in other ways. Potential employers often check applicants' credit scores and use them as a measure of your character. So do cell phone service providers, which can deny you the service contract you want. Utility companies may require a deposit from customers they don't think are creditworthy. A potential landlord might also reject your application.

Next you're 'in default'

If your payment is 270 days late, it is officially "in arrears". "The financial institution to which you owe the money will forward the problem to a collection agency. The agency will do its best to get you to repay, aside from actions prohibited by the fair debt collection practices act. Debt collectors may also rely on fees to cover the cost of collecting money.

It may be years before the federal government gets involved, but when it does, its powers are significant. It can seize your tax refund and apply it to your outstanding debt. It can "garnish" your paycheck, which means it will contact your employer and send a portion of your paycheck directly to the government.

What you can do

These dire consequences can be avoided, but you must act before your loan is in default. Several federal programs are designed to help, and they are open to anyone who has federal student loans, such as stafford or grad plus loans, though not to parents who have borrowed for their children.

  • Three similar programs, called income-based repayment (IBR), pay as you earn (PAYE) and revised pay as you earn (REPAYE), reduce loan payments to affordable levels based on the applicant's income and family size.The government may even contribute a portion of the interest on the loan and forgive any remaining debt after you have made your payments over a period of years.

That last feature, by the way, is the origin of the nickname "obama student loan forgiveness program. "The balance is forgiven, but only after 20 to 25 years of payments. And payments can be reduced to zero, but only if the person in debt has a very low income.

  • The public service loan forgiveness program is specifically for people who work in public service, either for the government or for a nonprofit organization. People who participate can be eligible after 10 years of work experience and 10 years of payments. (for more information, see debt forgiveness: how to default on your student loans. )

Details on these federal programs, as well as eligibility information, are available online.

It's important to remember that none of these programs are available to people whose student loans are in default.

A good first step is to contact your lender as soon as you notice that you are having trouble keeping up with your payments. They may be able to work with you on a more profitable repayment plan or guide you to one of the federal programs.

The downside

There is an advantage to student debt, and it's this: if you keep up your payments, it will improve your credit score. According to experian, consumers with student loan debt have, on average, a higher credit score than those who are debt-free. That solid credit history can be crucial for a young adult going for a first car loan or home mortgage.

Worst case scenario

About this man who found himself with armed US marshals on his doorstep : he borrowed the money 29 years ago and couldn't pay back the loan. The government eventually sued. According to the U.S. Marshals service, several attempts to assist him with a court order failed. Contacted by phone in 2012, he refused to appear in court. A judge issued a warrant for his arrest this year, citing his refusal to appear. When marshals finally confronted him outside his home, he told CNN, "I went in to get my gun because I didn't know who these people were. "

And this is how you end up in front of an armed group of U.S. Marshals backed by local police for not paying a $1,500 student loan. (the man says he paid the debt, didn't know about the warrant and can't remember making the call.

But even this sad story has a semi-happy ending. Eventually, he was taken to court and the man agreed to pay back his old student loan of $200 per month plus accrued interest. After 29 years of interest, the $500 debt had grown to about $5,700.

The bottom line

The government and the banks have a good reason to work with people who have difficulties paying their student loans .. Student loan debt has reached an all-time high, with an estimated 40 million people carrying an average balance of 29.000 dollars owed to him, reports the credit institution experian.You can be sure that the banks and the government are as anxious to get the money as you are to pay it back.

Make sure you notify them as soon as you see potential problems ahead. Ignoring the problem will only make it worse.

You may also be interested in reading student loans: paying off your debt faster and 10 tips for managing your student loans.