Now that President Biden's student loan forgiveness program isn't happening, federal student debtholders will have to gear up to start making monthly payments after a multiyear pause. And that's not going to be an easy thing to do -- especially at a time when inflation is still an issue and living costs remain elevated.
If you're on the hook for repaying student loans after an extended break, it's important to make sure you're equipped to handle those payments. That's because defaulting on that debt could have major consequences.
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You don't want to wreck your finances for years
Any time you default on a debt, it has the potential to wreck your credit. This holds true whether you fail to repay a home equity loan, a credit card balance, or student loan debt.
Of the various factors that go into calculating your credit score, your payment history carries the most weight. And your payment history is a measure of how timely you are with bills and how trustworthy a borrower you are.
When you're late paying bills, it sends the message that you can't be trusted to borrow, and that's reflected in your credit score. Similarly, when you default on a loan -- meaning you stop making payments altogether -- it's an instant black mark on your payment history and credit report. So defaulting on your student loans -- or any loans -- could cause your credit score to take a massive dive.
Once that happens, you may be denied the opportunity to take out another loan or refinance an existing one. You may also be denied the chance to rent a home if your credit is poor, even if your earnings are such that you can afford the monthly payments you'd be liable for. Plus, a major drop in your credit score could prevent you from meeting major life goals, like being able to purchase a place of your own and enjoying the financial benefits of homeownership.
You should also know that when you default on a loan, that negative activity could remain on your credit report for up to seven years. So you're not just talking about near-term damage -- you could end up setting yourself up for years of financial upheaval.
How to avoid defaulting on your student loans
If your student loan payments are about to start coming due and you're worried about keeping up with them, reach out to your loan servicer to discuss your options. You may be able to get onto a new repayment plan that results in lower monthly payments.
There are also other options you can look at with federal student loans, like putting your loans into forbearance or pursuing student loan deferment. You'll generally need to meet certain criteria to take advantage of these options, but they may be available to you, so it's worth a call to your loan servicer to find out -- especially if it spells the difference between defaulting or not defaulting on your debt.
