If you're struggling to pay your loan, you're not the only one. In fact, 27% of students who graduated in 2004 have defaulted on their student loans. While missing a payment of your student loans may seem alarming, there are some options that can help you out. But first, what happens if you don't pay your student loans?
What happens when you don't make payments?
Depending on the type of loan and how late the payments are, many different things can happen. In all cases, your interest will continue to accumulate and you will have more debt to pay off than before. As this interest piles on, your payment can rise and make it even more difficult to get out of debt.
If your payment is late enough, your loan provider can report your delinquency to the three major credit bureaus. This will cause your credit score to fall and make it harder to get good rates when financing in the future. Even worse, depending on how long it's been since you made a payment, you can enter loan default.
Default
If you have federal student loans, your loans enter delinquency after 90 days without payment. If you don't pay your student loans for 270 days, they will enter default. Default can cause many problems that can cause years to fix, so it's best to avoid this option at all costs.
When you default, you're automatically responsible for repaying the full amount of the loan. The default will get reported to the three major credit bureaus. Your tax return and federal benefit payments can be withheld and applied towards your loan balance. Your wages may also be garnished, meaning your employer automatically sends a percent of your income to payoff the student loan.
If you have private student loans, the consequences for default can be similar. However, you will need to check with your current loan provider to see the default terms.
Other alternatives if you don't pay your student loans
If you're struggling to make payments and scared that you'll enter delinquency or default, there are options for you.
Use an income driven repayment plan
If your loans are federal, you can join one of their income driven repayment plans. With these plans, your repayment will be based off of your income, meaning if you aren't making a lot, you don't have to pay a lot. However, with these plans you can end up repaying for up to 20 years until your balance is forgiven and there is always interest accumulating. If your payments are not more than interest, your payoff balance will keep growing. This is a great option to avoid delinquency, but can hurt from the buildup of interest.
Enter Forbearance or Deferment
Forbearance and deferment can be good tools to temporarily pause your payments until you get back on your feet. Each has certain criteria, but you can use them if you're struggling to make payments. Check here to see if you are eligible. Deference may not accumulate interest depending on the type of loan you have, while forbearance will always accumulate interest. However, both will temporarily pause your payments until you can afford it. Be careful with these options, because again you will accumulate interest which could hurt you in the long run.
Refinance your loans
Another option to help you make your payments is to refinance your loans. This could help lower your monthly payments to a manageable amount. If you refinance to a loan with a longer term than you currently have, your payment will go down in most cases. However, this will also increase the total amount of interest you will pay over the loan's lifetime. If you make extra payments when you can, this increased interest will be minimal.
One new method that has become popular recently is an Income Share Agreement (ISA). In these arrangements, a person will pay a small percent of their income for a set period of time in exchange for funding. There is no interest or debt, you just pay that percent until your obligation is complete. ISAs also include downside protection. This means if you lose your job or decide to go for further education, your payments pause and don't have interest piling on. Defynance is currently working on an ISA for college graduates with debt.
