What Happens If You Don’t Resume Student Loan Payments?

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With the expiration of the pandemic-era freeze on federal student loan payments this fall, more than 40 million Americans will once again be required to make payments under the terms of a debt ceiling deal approved by Congress.

Beginning on September 1, student loan interest will start accruing, and payments will resume in October. This poses a challenging situation for many borrowers, especially those already facing financial difficulties.

While it may be tempting to continue avoiding payments, the consequences can be severe, including a negative impact on your credit score and ineligibility for future aid and benefits.

In response to this, President Joe Biden recently proposed a plan for a 12-month grace period to assist borrowers who might struggle initially when payments restart. However, specific details about the plan are yet to be released.

Following this grace period, financial experts suggest that delinquency and bankruptcy should only be considered as last-resort options. In the short term, it is often more beneficial to explore deferment and forbearance, which temporarily pause payments, although interest may continue to accrue.

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

Once payments resume, borrowers who are unable or choose not to pay risk delinquency and, eventually, default. This can significantly harm your credit rating and render you ineligible for additional aid and government benefits.

If you are struggling to make payments, financial advisers recommend first checking if you qualify for an income-driven repayment plan. This plan determines your payments based on your expenses. You can determine your eligibility by visiting the Federal Student Aid website. If you have worked for a government agency or a non-profit organization, you might also qualify for the Public Service Loan Forgiveness Program, which forgives student debt after 10 years.

Carolina Rodriguez, Director of the Education Debt Consumer Assistance Program at the Community Service Society of New York, emphasizes that individuals who are temporarily unemployed should qualify for a $0 payment plan. Many others also qualify based on income and family size.

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

Rodriguez advises against deferment or forbearance unless all other options have been exhausted. In the long term, these choices offer 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 a better option.

This is because interest typically does not accrue 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. However, all other federal student loans that are deferred will continue to accrue interest.

HOW DID THE SUPREME COURT RULE ON STUDENT LOAN FORGIVENESS?

The U.S. Supreme Court recently ruled against the Biden administration’s attempt to cancel or reduce student loan debt, effectively ending the $400 billion plan that would have provided debt cancellation for up to $20,000 in federal student loans for 43 million individuals. Among them, 20 million would have had their remaining student debt completely erased.

The divided court concluded that the Biden administration exceeded its authority in attempting to cancel or reduce student loans without the endorsement of Congress. The 6-3 decision, with conservative justices in the majority, also rejected the argument that a bipartisan 2003 law related to student loans granted the authority claimed by President Biden.

WHAT DID PRESIDENT BID

Frequently Asked Questions (FAQs) about student loan payments

More about student loan payments

• Federal Student Aid website: Federal Student Aid
• Public Service Loan Forgiveness Program: Public Service Loan Forgiveness
• Information on income-driven repayment plans: Income-Driven Repayment Plans
• Fresh Start program details: Fresh Start Program
• Bankruptcy and student loans: Bankruptcy and Student Loans
• Information on loan cancellation options: Loan Cancellation Options