What happens if you stop paying back student loans?

WASHINGTON — After three years, pandemic era freeze federal student loan payments will end this fall and more than 40 million Americans will have to start paying again under the terms of the debt ceiling agreement passed by Congress.

Student loan interest will begin to accrue on September 1 and payments will begin again in October. That means many borrowers have to make tough decisions, especially those have a difficult financial situation.

Continuing non-payment may sound tempting, but the consequences can be serious, including affecting your credit score and being excluded from future benefits and benefits.

However, President Joe Biden on Friday laid out a plan for a 12 month grace period to help original borrowers who had trouble making payments again. Exact details have yet to be announced.

Then, experts say delinquency and bankruptcy should be the last resort. Deferring and deferring payments – pausing payments, although interest may continue to accrue – is often better in the short term.

When payments begin in earnest, borrowers who are unable or default to repay are at risk of delinquency and eventual default. That could be bad hurt your credit rating and make you ineligible for supplemental subsidies and government subsidies.

If you’re having trouble paying, advisors first encourage you to check if you’re eligible for an income-based repayment plan, which determines payments your costs by considering your costs. You can see if you qualify by visit the Federal Student Aid website. If you have worked for a government agency or a nonprofit organization, you may also be eligible for Debt forgiveness program for public serviceswrite off student debt after 10 years.

Carolina Rodriguez, Director of the Education Debt Consumer Assistance Program at the New York Community Service Association, emphasizes that anyone who is temporarily unemployed may be eligible for a $0 payment plan. And many others qualify based on income and family size.

“The consequences of falling into delinquency can be quite serious,” says Rodriguez. “The federal government can administratively block tax refunds and withhold wages. And it could affect Social Security, retirement and disability benefits. Does it make financial sense at the time? Sure is not.”

Rodriguez said her institution always advises against delaying or delaying repayment unless the borrower has exhausted all other options. In the long run, those financing options offer little benefit, as some loans will continue to accrue interest while paying off late.

Of the two, deferral is generally a better option, said Abby Shafroth, senior attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.

That’s because interest usually doesn’t accrue on the Direct Subsidized Loan, the subsidized portion of the Direct Consolidation Loan, the Subsidized Federal Stafford Loan, the subsidized portion of the Consolidation Loan. FFEL and the Federal Perkins Loan. All other deferred federal student loans will continue to accrue interest.

“A temporary repayment allows you to defer payments without affecting you, but interest accrues. So you’ll see your balance grow every month.”

The US Supreme Court has ruled that the Biden administration exceeded its authority in trying to cancel or reduce student loan debt, killing a $400 billion plan that would cancel up to 20,000 dollars in federal student loans for 43 million people. Of those, 20 million will have their remaining student debt completely forgiven.

The court is bitterly divided that says the Biden administration has exceeded its authority in trying to cancel or reduce student loans for millions of Americans, says the administration needs congressional approval first. implementing such an expensive program. The 6-3 decision, with a conservative majority of judges, also rejected arguments that the 2003 bipartisan law dealing with student loans provided the authority Biden claimed.

Biden announced a 12 month grace period when billing restarts. Biden said borrowers can and should make payments in the first 12 months after the payments resume, but if they don’t, they’re not at risk of default and it won’t affect their credit scores. their use.

Separately, the administration plans to pursue student debt relief with a different legal justification than the one rejected by the Supreme Court. Instead, the White House hopes to provide relief using the Higher Education Act, a broad federal law that governs the student loan program. Exactly who will qualify and how much will be forfeited will be decided through the federal rule-making process. But that process can take several months or even longer, so this cancellation attempt won’t happen quickly.

There are still many questions about the plans and it is still not entirely clear how they will work.

Furthermore, there’s no guarantee Biden’s new pardon plan can weather another legal challenge. The Higher Education Act was used to student debt relief, but never at this scale. The Trump administration’s education attorneys concluded in 2021 that the education secretary “doesn’t have the statutory authority to order total or mass revocations” under the act.

For most student loan borrowers, it is still very difficult to get your loans disbursed or canceled through bankruptcy. Borrowers must demonstrate a very difficult standard of financial circumstances, known as “excessive hardship”.

“That doesn’t mean people shouldn’t consider it,” says Rodriguez. However, they may not be successful in paying off their loans.

For borrowers showing such levels of financial stress, they most likely have other options, says Rodriguez.

She advises that borrowers make sure they are talking to a bankruptcy attorney who understands student loan bankruptcies, which require different proceedings than other types of bankruptcy. .

Shafroth, of the NCLC, says that new guidance on student loan bankruptcy has been introduced in recent years.

“While it can be difficult to get your loans settled through the bankruptcy process, more and more borrowers are becoming eligible to settle their loans that way,” she said. impossible.’ But it is increasingly possible.”

When you’re 270 days late on a loan payment — about 9 months — that loan will appear on your credit report as default.

“At that point, it wasn’t just behind, it was in the collections,” says Shafroth. “That’s when you become ineligible for federal new student aid. A lot of people fall into default because they can’t finish their degree the first time. This prevents them from going back to school.”

When a loan defaults, it follows the collection processes mentioned above. That means the government can collect wages (without a court order) to pay back loans, block tax refunds, and seize part of Social Security checks and other benefit payments. .

Shafroth said that many borrowers may still be eligible for loan cancellations through a series of patchwork programs outside of the debt forgiveness program proposed by the Biden administration.

“If your school closes before you can complete your program, then you are eligible for relief. If your school lied to you or misrepresented the results of your application, you can apply for borrower protection and have your loan canceled on that basis,” she said. If you are disabled, you can sometimes have your loan canceled on that basis.”

Shafroth encourages borrowers to consider Student support website to see what their options might be before missing payments.

Under the Biden administration New start programBorrowers with federal student loans who were in default before the pause have a chance to become current.

Insolvent borrowers won’t have to go through the collection processes or have their wages deducted until around August 2024, or about a year after the payment freeze ends. These borrowers have also been allowed to reapply for federal student loans to complete their degrees. Finally, these defaulted loans are now being reported to credit bureaus as they are.

That said, borrowers must act if they want to avoid default after this year-long leniency period ends.

To remove your offending record, you should contact the Department of Education’s Violations Team online, by phone or by mail, and ask the team to remove the offending loans through the New Start policy. . In four to six weeks, any defaults will be removed from your credit report and loans will be placed with a loan service company. This will also give you access to income-driven repayment plans and Public Service Loan Forgiveness, if applicable.

The New Start program also applies to borrowers who were past due prior to the suspension of payments. Those accounts will be considered current, and borrowers will have the option to enroll in income-driven repayment plans that can reduce bills to as little as $0, or apply for deferral, deferral, or bankruptcy. .