It’s Almost Time to Resume Student Loan Payments: The Consequences of Not Paying

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In the upcoming fall, the freeze on federal student loan payments implemented during the pandemic will come to an end after three years. As per the terms of a debt ceiling agreement passed by Congress, more than 40 million Americans will once again be required to resume making loan payments.

Starting from September 1, student loan interest will begin to accrue, and payments will restart in October. This poses a challenging situation for many borrowers, especially those already facing financial difficulties.

While it may be tempting to continue not making payments when autumn arrives, the repercussions can be severe, including a negative impact on your credit score and disqualification from future aid and benefits.

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Experts advise that delinquency and bankruptcy should be considered only as last resorts. In the short term, deferment and forbearance options, which temporarily pause payments while interest continues to accrue, are often more beneficial.

WHAT HAPPENS IF I DON’T MAKE STUDENT LOAN PAYMENTS?

Once the moratorium ends, borrowers who fail to make payments face the risk of delinquency and eventual default. This can significantly damage your credit rating and render you ineligible for additional aid and government benefits.

If you’re struggling to make payments, financial advisors suggest first checking if you qualify for an income-driven repayment plan, which determines your payments based on your expenses. You can determine your eligibility by visiting the Federal Student Aid website. Additionally, if you have worked for a government agency or a non-profit organization, you may be eligible for the Public Service Loan Forgiveness Program, which forgives student debt after ten years.

Carolina Rodriguez, Director of the Education Debt Consumer Assistance Program at the Community Service Society of New York, emphasizes that anyone temporarily unemployed should be able to qualify for a $0 payment plan. Furthermore, many others qualify based on their income and family size.

“Falling into delinquency can have severe repercussions,” Rodriguez stated. “The federal government can intercept tax refunds and garnish wages administratively. It can also affect Social Security, retirement, and disability benefits. Does it make financial sense at that point? Probably not.”

Rodriguez’s organization always advises against deferment or forbearance unless borrowers have exhausted all other options. In the long run, these financial choices provide little benefit, as some loans will continue to accrue interest while deferred.

Abby Shafroth, senior attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, suggests that, between the two, deferment is generally the better option.

This is because interest generally does not accumulate on Direct Subsidized Loans, the subsidized portion of Direct Consolidation Loans, Subsidized Federal Stafford Loans, the subsidized portion of FFEL Consolidation Loans, and Federal Perkins Loans. On the other hand, all other federal student loans that are deferred will continue to accrue interest.

“Forbearance allows you to postpone payments without negative consequences, but interest accrues. This means your balance will increase every month.”

HOW DID THE SUPREME COURT RULE ON STUDENT LOAN FORGIVENESS?

The U.S. Supreme Court has ruled against the Biden administration, stating that they exceeded their authority in attempting to cancel or reduce student loan debt. Consequently, the $400 billion plan, which aimed to cancel up to $20,000 in federal student loans for 43 million people, was effectively invalidated. Of those affected, 20 million individuals would have had their remaining student debt completely erased.

The sharply divided court determined that the Biden administration required congressional endorsement before undertaking such a costly program, rejecting arguments that a bipartisan 2003 law pertaining to student loans granted the authority claimed by the administration. The 6-3 decision, with conservative justices in the majority, solidified this ruling.

WHAT ABOUT DECLARING BANKRUPTCY?

For the majority of student loan borrowers, it remains exceedingly difficult to have loans discharged or canceled through bankruptcy. Borrowers must meet a stringent standard of financial circumstances known as “undue hardship.”

“That doesn’t mean people shouldn’t explore this option,” Rodriguez explained. “But they may not be successful in discharging their loans.”

Borrowers facing that level of financial strain usually have other avenues to explore, according to Rodriguez. She advises borrowers to consult a bankruptcy attorney who specializes in student loan bankruptcy since the process differs from other forms of bankruptcy.

Shafroth from the NCLC states that new guidance on student loan bankruptcy has emerged in recent years.

“Although it is challenging to discharge loans through the bankruptcy process, an increasing number of borrowers are becoming eligible for loan discharge that way,” she said. “Many people write it off as impossible, but it is becoming increasingly possible.”

WHAT HAPPENS WHEN A LOAN GOES INTO DEFAULT?

Once a loan falls behind by approximately 270 days, or roughly nine months, it is marked as being in default on your credit report.

“At that point, it is not merely late; it is in collections,” Shafroth noted. “This disqualifies you from obtaining new federal student aid. Many people default because they were unable to complete their degree initially, which prevents them from returning to school.”

When a loan enters default, it becomes subject to the aforementioned collection processes. This means the government can garnish wages (without a court order), intercept tax refunds, and seize portions of Social Security checks and other benefit payments to repay the loan.

WHAT OTHER OPTIONS ARE AVAILABLE IF I CAN’T MAKE PAYMENTS?

Shafroth explains that many borrowers may still be eligible for loan cancellation through various programs outside of the proposed debt relief program by the Biden administration.

“If your school closed before you could complete your program, you may be eligible for relief. If your school provided false information or misrepresented the expected outcome of enrollment, you can submit a borrower defense application and request loan cancellation based on those grounds,” she explained. “If you have a disability, loan cancellation may be possible on that basis.”

Shafroth encourages borrowers to explore the options available to them by visiting the Student Aid website before missing any payments.

WHAT IF MY LOANS WERE IN DEFAULT PRIOR TO MARCH 2020?

Under the Biden administration’s Fresh Start program, borrowers with federal student loans that were in default prior to the payment freeze have an opportunity to rectify their status.

Borrowers who were in default will not face collection processes or wage garnishment until around August 2024, approximately one year after the payment freeze ends. Additionally, these borrowers have been granted permission to reapply for federal student loans to complete their degrees. Furthermore, the defaulted loans are now reported to credit bureaus as current.

However, borrowers must take action if they wish to avoid default after this one-year leniency period expires.

To eliminate the default record, borrowers should contact the Education Department’s Default Resolution Group online, by phone, or by mail and request that the loans be removed from default through the Fresh Start policy. Within four to six weeks, any record of default will be erased from the credit report, and the loans will be transferred to a loan servicer. This will also grant access to income-driven repayment plans and Public Service Loan Forgiveness, if applicable.

WHAT IF I WAS BEHIND ON PAYMENTS OR DELINQUENT BEFORE MARCH 2020?

The Fresh Start program also applies to borrowers who were delinquent on their payments prior to the payment freeze. These accounts will be considered current, and borrowers will have the option to enroll in income-driven repayment plans that can significantly reduce their monthly bills or to apply for deferment, forbearance, or bankruptcy.

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The Big Big News acknowledges the support of the Charles Schwab Foundation in providing educational and explanatory reporting to enhance financial literacy. Please note that the independent foundation operates separately from Charles Schwab and Co. Inc. The AP assumes full responsibility for its journalism.

Frequently Asked Questions (FAQs) about student loan payments

More about student loan payments

• Federal Student Aid website: https://studentaid.gov/
• Public Service Loan Forgiveness Program: https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service
• Fresh Start program information: https://www.consumerfinance.gov/about-us/blog/covid-19-and-student-loans-what-you-need-to-know/