With an estimated 15% of student loan holders in default at any given time, the question that often comes up is “What happens if you don’t pay your student loans?” This question is nothing new when it comes to higher education debt. However, it does seem as though the uncertainty of repaying student loans for a growing number of borrowers is bringing up the subject of student loan repayment more frequently.
The question of repaying student loans is discussed more frequently because the cost of higher education has soared. The result is the average college student now holds about $30,000 in student loan debt once leaving school. Moreover, it is not uncommon to hear of some people with $50,000 or more in college loans.
Not paying student loans can have long-lasting consequences resulting in further financial hardship. Not only can this put a borrower’s financial goals on hold but it can also limit other things in life like getting married or starting a family.
Defaulting on student loans will not make them go away.
How did the student loan problem get so bad?
Because the total outstanding student loan debt is spiraling out of control at an estimated $1.7 trillion dollars now, it is important to look at why borrowers are having a hard time repaying the money loaned to them for a college education. The simple answer is the cost of higher education has soared at around 8% per year which is about twice the rate of inflation. This is all at the same time as the wages for most of America have remained stagnant.
The high cost of a college education with a decreasing amount of money a family can contribute to education is leaving a growing number of university students with more debt. A growing balance of borrowed money is increasingly challenging to repay.
The higher education loan guarantee is a falsehood.
A big reason student loan debt has gotten so bad is due to the fabrication that a college education leads to financial security and a stable career. Young adults are still being told that a college degree is the only path to success. They are told not to worry about taking on decades of college debt because it will pay off with a good job following the degree they earn.
Many young people are told they also deserve the so-called “college experience.” This is resulting in that experience at any cost as well. Because more people are deciding to go to college, the demand is raising the prices.
There are no guarantees with a college degree and there never has been. However, the odds of success today are not quite what they once were when decades of student loan repayment are calculated into the outcome. Therefore, the higher education guarantee is a problem and myth still being taught to people from a young age.
Federal funding has only increased the cost of a college education.
Another reason college debt has gotten out of control is due to federal funding and student loans. There is evidence of a direct relationship between the amount of money a person can borrow from the government for a college education and the cost of getting it. Colleges have historically raised the price of their tuition when students are able to borrow more money.
There is a big reason why the discussion of free college or student loan forgiveness would be a huge problem. That reason is that college costs would only be free or forgiven on the surface but taxpayers would be paying more while the universities would charge even higher prices than they already do.
Student loans are not easily discharged in a bankruptcy.
With the cost of tuition rising at a rapid rate combined with college students needing to take on larger amounts of debt, the consequence is people holding larger amounts of student loan debt. The problem with this is federal student loans are almost impossible to get discharged in bankruptcy. The high balance of college cost loans and the likelihood of paying them off entirely or claiming them in bankruptcy is a problem.
There is a reason the government gives out federal student loans so easily and this is due to the difficulty of getting rid of them without paying them back. Federal student loans are the only money a person can really borrow without much credit history or known ability on how the money will be paid back. This has clearly added to the national student loan debt.
It is not only educators and adults telling young people to borrow large amounts of money for education but the government is also lending a hand by letting people easily borrow thousands of dollars for an education. The government is silently providing the higher education guarantee lie they do know is not true by allowing people to borrow the large sums of money that they do.
What does happen when you can’t pay your student loans?
First, you need to understand there is generally a grace period before being required to pay back federal student loans. This is usually a six-month time period after leaving school for Direct Subsidized and Unsubsidized Federal Education Loans.
Following the grace period for paying back education loans, is when a growing number of people start to have a problem repaying the debt. However, the money owed is often not immediately sent to collections. There are methods for stalling student loan repayment delinquency and default which can include filing for:
Forbearance or Deferment – This can temporarily stop or reduce student loan payments for a period due to some type of hardship like a job loss. A borrower might be able to make interest-only payments during this time or stop them entirely. However, it is important to realize that interest will still accrue even if payment stops completely.
Income-Driven Payments – This is another way to reduce the amount required monthly with a student loan payment based on the income of a borrower.
Although there are programs to help people struggling to repay their federal student loans, it is important to realize there are only so many times a person can apply for assistance. Sooner or later payments will have to be made either on a level according to a person’s income or the entire agreed monthly payment in the loan will need to be made.
90 days without a student loan payment
When there is no forbearance or deferment in place for student loan repayments and a borrower does not pay for 90 days, the loan becomes officially delinquent. The borrower’s credit rating will be hurt and all three major credit reporting companies will be notified.
The result of a delinquent status for student loans will be higher interest rates for most loans and the possibility of being completely denied to borrow any money from a traditional bank.
270 days without a student loan payment
A borrower that does not make a payment on their student loans for 270 days will officially be classified in default. This is when collection agencies will likely get involved. The Department of Education works with collection companies that are happy to charge penalties and late fees to borrowers that do not pay. These can lead to owing thousands of dollars more on the outstanding balance of a student loan.
What is the result of student loan delinquency?
Late fees and penalties will start to add up the longer a student loan remains in delinquency status. Adding to the balance of student loans is the only problem that will begin to unfold with not paying back education loans.
Don’t expect a tax refund.
If your employer is withholding federal tax in your paycheck and generally you plan to get a refund each year from the government, there is a chance that money could be withheld for repayment on education loans. The government might not do this right away but it could occur eventually.
Your wages at work could be garnished for not paying student loans.
When a person borrows money from the government for their education there are several tools at their disposal for recovering that money if a person decides not to pay it back. Wage garnishment is one of these. If a borrower does not pay their student loans, the government can take up to 15% of that person’s paycheck. If you earn $3000 per month, that is $450 that could potentially be withheld.
Once the government puts wage garnishment in place, it could continue until the loans are repaid or brought into good standing.
Eligibility for future financial aid could be lost.
If a borrower defaults on their student loans, future financial aid to further education could be lost. This could include scholarships, more student loans, and grants. Being in default on student loan repayment will not encourage the lender to help in the future.
Do student loans in default ever just go away?
There is a reason the government is happy to easily lend people money to further their education. The reason is due to the difficulty in getting rid of student loan debt that is not repaid. It is extremely difficult to get federal student loans discharged in bankruptcy or through any other method.
Credit reporting agencies will genuinely update their information on delinquent student loans within 7 years. However, the balance owed will show on a credit report until the money is repaid. The reality is delinquent student loan debt will never just disappear for any reason.
Bottom line…
Delinquent student loan debt is an extreme problem in the U.S. with an estimated $1.7 trillion in debt. Although only 15% of borrowers being in default at any given time might not seem to be that large of a number, the problem is it will likely even get much bigger in the future. With the rapidly rising cost of higher education, more college students are taking on larger amounts of student loan debt to fund their education.
As politicians and corporate America continue to seek the lowest costs while outsourcing labor and replacing jobs with technology, this is only expected to increase the competition for higher-paying jobs. The careers that can repay large amounts of student loan debt.
While more college students leave school with larger amounts of student loan debt, this is only going to increase the default rate resulting in an economy for young adults that will put life on hold. It will delay things, such as starting a family or purchasing a home. Moreover, large amounts of student loan defaults will potentially destroy any chance of financial security for future generations.
To solve the increasing problems associated with student loan debt something needs to happen. A college education does not necessarily need to be completely free but it does need to be more affordable.
