What Happens If You Don’t Pay Federal Student Loans



Student debt relief has helped millions of Americans during the pandemic. Effective March 27, 2020, the federal student loan interest rate is set at 0% and payments are suspended.

But politics is now expires on October 1, 2021.and many borrowers still struggling financially, leading many to wonder: what happens if I am unable to make payment on my student loan?

Private student loans do not have federal protection and have special contracts that determine the consequences of missing a payment. However, the consequences of not paying a federal student loan often follow a common pattern.

Here’s a step-by-step guide on what happens when a borrower misses a federal student loan repayment:

After receiving education

Federal student loans are payable when the borrower graduates from high school or drops out of school. However, most federal student loan borrowers are granted Grace period

Borrowers with direct subsidized, direct unsubsidized, or federal family education loans are given a six-month grace period before they are expected to start making payments.

Borrowers with a Perkins loan are granted a grace period of nine months.

After the grace period, borrowers are expected to make recurring payments in accordance with their selected repayment plan

15 days after the due date

Persis Yu, director of NCLC’s student loan assistance project, says most federal student loans provide borrowers with an approximately 15-day grace window after their normal maturity. This means that if you are less than 15 days late with your federal student loan payment, there will likely be little consequence.

However, if a borrower fails to make payment after the end of this period, their loans will be considered overdue and may begin to affect the credit ratings of borrowers, which can have significant long-term consequences, such as making it difficult to buy a car or home. A bad credit history can also affect employment opportunities when an employer checks a creditworthiness.

“But at this moment you still have time to get back on your feet. You can still make a payment and then get back to normal, ”says Yu.“ The really bad things start to happen a little later. ”

270 days after due date

After 270 days, federal student loans will expire. After defaulting on federal student debt, the government can charge borrowers’ wages, Social Security checks, federal tax refunds, and disability benefits. In some states, borrowers with unpaid student loans may receive professional licenses revoked as well as their driver’s license

“Private lenders must get a court order before they can withhold your wages. The Department of Education doesn’t have to, ”says Ashley Harrington, federal director of advocacy and senior advisor to the Center for Responsible Lending. “They just have to send you 30 days notice before the seizure starts and give you the opportunity to appeal.”

“The government has exclusive authority to collect payments under the auspices of Debt Collection Improvement Act“says Yu, listing all the different ways the federal government can collect missed student loan payments.” The most common collection practice is the forfeiture of any tax refunds. When social security benefits or wages are paid, they usually take about 15% of those benefits, but when taxes are refunded, they actually take the full amount. “

She adds that receiving tax refunds, such as the Earned Income Tax Credit, can have dire consequences for families and children.

“There has been a significant amount of research done to show that the Earned Income Tax Credit is the most effective. poverty alleviation measure what we have in this country, – says Yu. – And therefore the consequences of taking this money are actually passed down from generation to generation. “

Yu adds that borrowers by default “can apply for what is called“ Abstinence after 270 days, ”in which you can retroactively repay [the delinquency]… You have to interact with your service agent and you have to fill out a special form. “

One year after the due date

If a borrower hasn’t made a payment for a year, federal student loans are often transferred to a collection agency by default, Harrington says.

The Department of Education works with third-party collection agencies that charge fines and fees for non-payment, sometimes up to eighteen% loan balance.

Collection agencies “harass people with calls and text messages that can exacerbate the psychological stress of debt,” Harrington explains, noting that around this time, the impact of default on a borrower’s credit will be significant. “Unfulfilled loans affect your credit rating, can limit access to credit and make the loan more expensive in general. It will make your life much more difficult. “

At this point, Harrington encourages borrowers to check with their service providers to see if they are eligible for postponement due to economic difficulties or if they can switch to a repayment plan that works best for them so they can get back on track. But in the end, she said, some borrowers have their hands tied.

“Failure to pay federal student loans, default and delinquency can be truly disastrous. Consequences that can complicate your life in many ways, and we need to be very aware of this, ”says Harrington. “But it’s also important to note that there are a lot of people who are really struggling, and student loan payments are part of that. Some do not decide not to pay their debts, but they have many other obligations: they have to pay rent, we are in a pandemic, there are job losses, there are underemployment, there are childcare needs … There are all these others. things that student loan borrowers deal with.

“And they need to keep the lights on.”

“One of the really unique features of federal student loans is that they have no statute of limitations,” says Yu. “So the consequences can last for a very long time.”

Fortunately, unlike some private student loansFederal student loans are paid on death.

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