For many college graduates, student loans will continue to be a burden long after their college days. Across the United States, almost 45 million citizens have student loan debt with an average of $32,731 in loans – that’s a $1.56 trillion total debt in 2020!
With such a huge national loan (the second-largest overall loan after mortgage loan), you may be thinking: “Would the government really miss my $32,000 loan when they have over a trillion dollars to collect from other students? What happens if I don’t pay my student loans? I heard that if I didn’t pay my student loans after 7 years, it would go away and I can live debt-free.”
There are major problems with thinking this way. First of all, if all students thought the same way, that’d be a trillion-dollar loss for the government, and of course, that wouldn’t slide. Second, while student loan forgiveness is a thing, it’s much more complicated than just pretending your loans don’t exist and then waiting for it to go away magically.
Here’s what you should know.
What Happens If You Don’t Pay Student Loans?
Technically speaking, you can ignore your student loan debt, but that doesn’t mean it’s going to go away without any consequences. Contrary to what some people believe, if you don’t pay your student loans after 7 years, your student loans will not magically go away. In fact, student loans do not have a statute of limitations, which means it can haunt you even into your forties and fifties.
Bad Credit Score
If you don’t pay your student loans, it will reflect on your credit score. Even if you miss just one payment, it will hurt your score. This is a financial report that indicates your creditworthiness, something banks and private lenders use when assessing whether to give you the loan you want.
Bad credit reports because of unpaid student loans can disqualify you from mortgages, auto loans, and credit card applications. Landlords may even refuse to rent their properties to you because they may think your poor credit report means you’re less likely to pay rent on time.
As a result, plenty of good loans in the market may be closed off to you because private companies see your credit score (which worsens as your student loans accumulate interest and penalties) and look at you as a liability. So, when you finally need a loan later in life,
Affecting Your Job Prospects
A bad credit score due to student loans can also affect your job prospects. Around 30 percent of employers check the credit histories of job applicants, especially if you’re applying for a job that handles the company’s finances or the company works in the finance industry.
This is to make sure you aren’t susceptible to theft or fraud. They won’t see your credit score, but they will see your loans and open lines of credit. Even if student loans are common, if they see you’re prone to making late payments, some employers may see this as a reflection of your character.
Sued for Wages
By not paying your student loans, your lender has the right to sue you and take out a chunk of your salary or wages until the total amount is paid. If you took out loans from a federal loan lender, they can take up to 15 percent of your monthly social security payments.
Defaulting on Student Loans
Around 3,000 borrowers default on student loans every day. Defaulting may seem like a better option than spending an average of 20 years to pay off student loans, but that’s not necessarily the case.
Federal Student Loans
If you take out federal student loans and miss a payment, you have 270 days to pay, or else your debt goes into default. After 270 days and you don’t pay, the government will have the right to take a cut of your wages, your social security checks, your federal tax refunds, and even your disability benefits to pay off your loan.
The government will also work with a third-party debt collector. This agency will charge as much as 18 percent of your loan balance for collecting.
In worst-case scenarios, the government also has the right to sue borrowers who don’t t pay. The worst part: based on the thousands of cases the government has had against those who do not pay student loans, it’s highly unlikely that this will be a case you can win. And when the government wins the case, they have the right to place a lien on your home and force a sale. This means you lose your home and the revenue taken from that sale will go towards paying your student loans.
Private Student Loans
The effects of missing a student loan payment from a private loan can vary between the lender’s agreement and state laws. Because they aren’t a federal entity, they cannot go after your wages, tax refunds, or any other government benefits.
Their only remedy is to sue you for the remaining loan balance. So, when you default on a loan, expect that your private lender will begin aggressively suing you. But if your lender does not have the right paperwork in court, it is possible to have your debt cleared.
Can Student Loans Go Away Without Paying?
No. Unlike other forms of loans, most student loans will not go away even when you file for bankruptcy. The moment you receive student loans, it doesn’t matter if you drop out and fail to earn your diploma. And if you do graduate, it doesn’t matter if you end up not finding a job, or work an underpaying job where you are overqualified – those loans will still follow you.
Trying to ignore your loans will only make things worse. Aside from the interest accrued, there are also the penalties and late fees associated with missing a payment. Continuous non-payment will get your debt moved into collections, which can also rack up additional penalties.
While this is happening, your credit score will be negatively affected, curtailing your loan options, rental property choices, and even your job prospects. Finally, either the government can take a cut of your wages or federal benefits, or your private student loan lender will take you to court.
How to Pause Student Loans
While you can’t escape paying student loans, you can have payments paused temporarily. This includes:
- If you’re still in school at least part-time;
- You cannot find a full-time job to pay off your loans;
- You have undergone a necessary medical procedure that can be difficult to pay alongside your own student loans;
- You are facing another financial hardship making it difficult or impossible to pay student loan payments on time.
Take note that this isn’t a solution to get rid of student loans completely. Most student loan providers offer a deferment of up to three years, while forbearance limits depend on your lender. Private lenders may provide deferment if you’re undergoing financial hardship, but there is no requirement that they have to just because you ask for it.
Can Student Loans Go Away Without Paying?
No. Unlike other forms of loans, most student loans will not go away even when you file for bankruptcy. The moment you receive student loans, it doesn’t matter if you drop out and fail to earn your diploma. And if you do graduate, it doesn’t matter if you end up not finding a job, or work an underpaying job where you are overqualified – those loans will still follow you.
Trying to ignore your loans will only make things worse. Aside from the interest accrued, there are also the penalties and late fees associated with missing a payment. Continuous non-payment will get your debt moved into collections, which can also wrack up additional penalties.
While this is happening, your credit score will be negatively affected, curtailing your loan options, rental property choices, and even your job prospects. Finally, either the government can take a cut of your wages or federal benefits, or your private student loan lender will take you to court.
The only way to stop paying the remaining student loans is to apply for student loan forgiveness.
Student Loan Forgiveness
In rare cases, you can have federal student loans forgiven, canceled, or discharged. This means you are no longer required to pay for the remaining balance due to circumstances that make you qualified. Take note of the difference between the terms:
- Forgiveness/Cancellation – You cannot make payments because of your job.
- Discharge – You are not required to pay your loans because you have a total or permanent disability (preventing you from earning) or the school where you received your loans closes down.
There are also other ways you can have your student loans forgiven. Contact your local federal student aid center for more information and to see if you qualify.
- Public Service Loan Forgiveness – If you are employed by a government or not-for-profit organization, the PSLF may forgive the remaining balance of your Direct Loans if you’ve made at least 120 qualifying monthly payments while working full-time for the mentioned qualified organizations.
- Teacher Loan Forgiveness – If you teach full-time for five complete and consecutive school years in a low-income elementary school, secondary school, or educational agency, you may be forgiven for up to $17,500 of your loan.
- Closed School Discharge – If your school closes while you’re enrolled or right after you withdraw, your federal student loan may be discharged.
- Perkin Loan Cancellation and Discharge – Your Perkins Loan can be totally or partially canceled or discharged based on certain conditions.
- Total and Permanent Disability Discharge – If you are totally or permanently disabled, you can qualify to have your loans discharged.
- Discharge Due to Death – Your student loans will be discharged if you or the borrower (your parent or you) died.
- Discharge Due to Bankruptcy – Declaring bankruptcy does not automatically discharge your student loans, but you can try to request for discharge in case you are officially bankrupt to try to alleviate your debt.
None of these ways to forgive or discharge your loan mean ignoring your student loans and letting it build up. To apply for forgiveness, contact your loan servicer or your school. Take note that these loan forgiveness methods only apply to federal student loans.
Depending on which type you can be forgiven or discharged, you may need to continue paying your student loans while your application is processing. If only a portion of your loan is forgiven, you will need to pay for the remaining balance.
What About Private Student Loans?
Private lenders are not required to defer or forgive a portion of your student loans (and it’s definitely not in their best interests to forgive your entire loan). However, don’t let this stop you from giving your lender a call.
It’s in your lender’s best interest to defer your payments and let you pay at a later date rather than to take you to court and only receive a lower amount than your loan.
Conclusion
While you technically can ignore your student loans, that’s not to say you won’t experience any negative effects out of it. You cannot escape student loans by pretending it doesn’t exist and hoping the government will forget about your loans eventually.
The best thing you can do is to make sure you pay your student loans on time. If you can’t, try contacting your local lender service and have it deferred until such time you can complete your payments.
And if you’re just thinking about applying for student loans and have just read all this, hopefully, it will help you consider your options when you take out loans and choosing between private and federal loans available to you.
