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What Happens If You Can’t Pay Your Student Loans?

Published February 9, 2021

5 minute read

David Ning

By David Ning

College or university costs a ton these days. Many students find themselves taking on a great deal of student loan debt. It’s not unheard of for some students to graduate with as much as half a million dollars in student loans. Let that sink in for a second. That’s $500,000 to eventually have to pay back. We haven’t even started calculating the interest charges that will be tacked on. With wages still stagnated in many places, it’s an almost impossible task.

The problem is really widespread. There is an estimated total of $1.6 trillion dollar in student loan debt owed in the United States. That debt is owed by roughly 45 million Americans.

On the bright side, help could be on the way. With the Democrats controlling both chambers of Congress and the White House, there’s a real possibility they will pass some sort of legislature that vastly expands student loan forgiveness. Until that day comes (if it ever does), you are pretty much on your own. When your student debt levels are high, but you can’t find a job that pays enough to keep up with payments, what options do you have left? Defaulting would be devastating to your finances, but it can feel like the only option sometimes.

What Happens If You Default?

The first question that many student loanees ask themselves is simple.

What happens if I default?

There are some serious consequences if you default on federal student loans. Your tax refund can be garnished (or taken completely). So you won’t get that money as you might expect. Additionally, the government can garnish your wages and even take some of your federal benefits. Finally, the government can decide to sue you if you default. You might also be ineligible for certain programs and assistance.

If you have private student loans, they can take you to collections. Your credit score will suffer a huge hit and you could still see your wages garnished if collection agencies successfully sue you.

Avoid Defaulting on Your Student Loans

You won’t default as long as you can make your student loan payments. For some, that might mean getting the payments adjusted or lowered. Indeed, there are ways to avoid defaulting on your student loans. The first step is to simply make contact with your loan provider and ask for help. Make sure are upfront with them and prove that you are experiencing a financial hardship that qualifies you for some sort of deferment or forbearance. Usually, they will attempt to help you. After all, restructuring your loan (but still receiving payments for it) is better for them.

These options can vary. Some might pause payments for a while (although you’ll still be charged interest and have to pay them eventually). You also might be able to reduce your regular payments by a bit. Even if you agree to only pay the interest for a while (and none of the principal), it might help you get your finances back in order. These options are still way better than simply not paying.

Any sort of payment deferment or forbearance can be a great help if you are struggling. Call your lender and ask about your options. You might also qualify for the government’s income-based repayment program. In this case, your student loan payments are adjusted to reflect what you can afford to pay based on your income. It can be a great way to set up manageable payments.

Forgiving Student Loans

In some cases, you might be eligible for partial student loan forgiveness. Or you might be eligible for a program that will pay some of your student loans. AmeriCorps, for example, can help you reduce what you owe in student loans. The organization will help you pay some of your debt. The same is true of military service.

It’s also worth noting that the government offers other options for student loan forgiveness. If you work in certain field, you might qualify for loan forgiveness. For example, there’s the Public Service Loan Forgiveness (PSLF) program. You may be able to get your loan partially forgiven if you worked for the government or a qualified not-for-profit organization. There are numerous requirements you have to meet, such as you needing to make any least 120 qualifying monthly payments under a qualifying repayment plan. Some teachers can also qualify for loan forgiveness if they teach for five consecutive years in a low-income school or educational service agency. It only forgives up to $17,500 in debt though.

On top of that, if you are willing to work in certain areas of the country (especially rural areas), you are often eligible for a certain amount of student loan forgiveness. This typically kicks in only after you work for a certain number of years. The Nurse Corps Loan Repayment Program, for example, will help pay for 60% of your outstanding nursing student loan debt over two years. There’s an option to add a third year for another 25% of debt paid. That means you can have up to 85% of your student debt forgiven. You just have to be accepted by the program and commit to three years of service in an area that the agency deems to have a critical shortage of nurses.

The Type of Loan Matters

The teacher loan forgiveness program, for example, will only forgive Direct Loans or FFEL Program Loans. The PSLF program only works for Direct Loans. There are many other programs and quite a few other types of loans. The bottom line is that it pays to research what forgiveness programs are available to you for the type of loan that you carry.

It’s also important not to jump at the first chance to consolidate and fold your loans into a new one just because the interest rates are lower. Do your homework first (and some math). Ensure that you won’t be able to get any part of your original loans forgiven, before you move it into a new loan — that likely won’t ever qualify for a forgiveness programs.

Do your homework before you just let your student loans lapse. Consider what payments you can afford, then contact your creditors about your options. If you really are experiencing financial difficulty, there is probably some sort of help available to you. However, the sooner you contact your lenders to arrange matters, the better. You don’t want to end up facing even more dire consequences by ignoring the problem.



David Ning

Experienced Finance Writer

David is a published author, entrepreneur and a proud dad. He firmly believes that anyone can build a solid financial foundation as long as they are willing to learn. He runs, where he discusses every day money issues to encourage the masses to think about their finances more often.

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