There are more than 43 million people in America who are saddled with student loan debt -- much of it (some 93%) from federal student loans. That's a lot of people -- more than 15% of the entire adult population in the U.S. (which totals more than 260 million). The average federal student loan debt balance was recently around $37,000 -- and when you owe that kind of money, it can be hard to get ahead.
For some borrowers, it's even worse, because they can't even make their loan repayments. If you don't pay back your student loans, lots of bad things can happen.
Image source: Getty Images.
An important heads-up
If you've been a student loan borrower for a few years, you probably know that in the early days of the pandemic, the Trump administration paused repayments on student loans. That pause was then extended several times, but now -- roughly three years later -- the extensions have run out. Repayments are scheduled to resume 60 days after the end of June, or Aug. 29.
This is a big deal, and millions of borrowers who have gotten used to living off paychecks without having to send out student loan repayments will suddenly need to plan for them. That might require a revision of household budgets, for one thing, and perhaps even coming up with ways to generate more income.
If you can't pay back your student loans...
Still... what if you just can't make those repayments? Well, as soon as you miss a payment, your loan is considered past due -- and delinquent. After 90 days of delinquency, credit bureaus will likely be informed, and that will leave a mark on your credit history, dinging your credit score.
After 270 days of not making payments on your student loans, many of them will be considered in default. That's bad. Here's what may happen:
- Your entire balance owed -- plus any interest due -- may be due immediately. (If you thought making monthly payments to pay off portions of debt was bad, having to pay off all your debt at once is worse!)
- You may no longer be able to defer payments or apply for a relief or repayment plan.
- Your credit score will likely take a big hit. That means you'll be viewed as a poor credit risk, making it hard to borrow money, say, for a car loan or mortgage -- and it can even make it hard to get a credit card. (Increasing your credit score can be difficult and time-consuming.)
- If you're employed, it's possible that your wages may be "garnished" -- your employer may be required to start sending in a portion of your paycheck regularly to repay your loan. Your tax refunds and federal benefit payments may be applied to your debt instead of being sent to you.
- You can lose eligibility for federal student aid.
- You may even be taken to court over defaulted debt, which can be costly not only in terms of time, but also in court costs and legal costs.
Clearly, it's very important to not fall into default on a loan -- and to avoid delinquency, too. Note that not every consequence above applies to every kind of student loan -- so read the fine print on your loan(s). Or, better still, just try to find a way to make your payments.
What to do if you can't pay back your student loans
If you're struggling with your student loans, it's smart to take action proactively, seeking help before things get any worse. A good first step is to contact your lender, letting them know that you're struggling. They may be able to offer a more workable repayment plan to help you avoid delinquency or default. Explore all available options.
Consider consolidating your loans, or refinancing them. Consolidating can be helpful in reducing the number of loans you have, combining them into a single new one -- often with a new and somewhat higher interest rate. When refinancing, you essentially get to replace one or more loans with a new loan, with new terms and a new interest rate. You may end up lengthening the term of your loan this way. This can be good in that it lowers your payments, but not so good in that it can mean you pay a lot more in interest over the life of the loan.
If you're delinquent with a loan, there are three key options that are likely available to you:
- Payment plans exist that can better suit your budget, including "income-driven" repayment plans (IDRs) that take your income into account.
- Forbearance will temporarily pause your loan repayments, but interest will accrue -- and you will be expected to make interest payments.
- Deferment also involves pausing your repayments. Interest owed will still accrue, but you may or may not be on the hook for paying it during the pause.
- Student loan forgiveness programs and repayment assistance programs also exist, though it's not necessarily easy to qualify for them. Read up on any or all of these options, if you think they might help you.
The bottom line is that student loan delinquency should be avoided, and defaulting on a loan should be avoided at all costs. A big perk of paying off your student loan debt is that you'll likely be able to start investing in the stock market in earnest, building long-term wealth.
