According to a report by the American Institute of Economic Research, student loan debt is on the rise. In 2003, student loans made up a little more than 3% of debt, but in the first quarter of 2017, student loans made up over 10%.
The delinquency rates for student loans are also rising. In 2017, the delinquency rate on student loans was at 10%. Before the Great Recession, the percentage of borrowers behind on student loan payments was closer to 7%.
The default rates are lower at Sallie Mae, says Rick Castellano, vice president of corporate communications for the consumer banking and loan company. Castellano says that roughly 98% of Sallie Mae’s customers are successfully managing their payments and less than 2% default annually.
“That number has been pretty consistent. Our private student loans are underwritten, meaning we assess the stability, ability, and willingness to repay before making a loan, ” he explains.
No matter the lender, what happens if you don’t pay your student loans?
6 consequences for non-payment
You can’t get away from paying student loans, which aren’t even cleared in a bankruptcy. Some borrowers may qualify for student loan forgiveness, but that is rare.
So if you have stopped paying your loans and don’t have a plan in place with the lender, consequences can be dour.
Here’s what you can expect to happen if you stop paying:
1 – Your credit scores will be negatively impacted
The number of payments missed will start to appear on your credit report around the 30-day mark, and your score will start dropping.
2 – Eventually, you’ll go into default
Federal student loans are usually considered in default after 270 days of non-payment. Private loans vary. Depending on your contract with the lender, missing one payment could be considered defaulting, though most companies will allow for more than one missed payment before considering your loan in default.
3 – Tax refunds can be taken away
If you have a federal loan and are in default, the federal government can intercept your tax refund and use it as repayment on your student loan. If you’re married and filing jointly, your spouse’s refund is also at risk.
4 – Garnished wages
A federal student loan allows the government to garnish (or take away) 15%. You can challenge this garnishment, but you don’t really want your employer to know that you’re not paying your bills, do you?
5 – Co-borrowers are in trouble
If your mom is on your loan as a co-borrower, she is also in trouble if your loans default.
6 – You can be sued
It’s highly unlikely that you’ll be sued if you have a federal loan, but private companies have been known to go after defaulters.
Millennials are getting better at managing their money
A new study by Sallie Mae surveyed college students ages 18 to 24 about how they spend and save their money. Despite the rise in delinquencies, the study revealed positive trends.
Castellano says, “It is encouraging to see that more than three-fourths of college students pay bills on time, and six in 10 never spend more money than they have available. Also, college students are putting money aside each month. More than half save at least some money every month, and 24% report having an emergency fund.”
These promising trends may be a result of the financial crisis. Many of the study’s participants grew up during the worst years of the Great Recession, which may have led them to adopt behaviors that promote sound credit management.
If you’re currently behind on your student loans, there are a couple of things you can do before you go into default and are affected by consequences such as wage garnishment.
Here are three options to consider:
1 – Forbearance or deferment
If you’re having trouble making payments, you may be able to pause your payments by using a forbearance or deferment. This will give you some time when you won’t be required to make payments. Deferments are the better choice because you usually won’t have to pay interest accrued during your time away from the loan. During forbearance, interest accrues at the normal pace.
2 – Income-driven repayment plan
An income-driven repayment plan can help you lower your federal student loan payments by adjusting the amount you owe based on your income. This does not apply to private student loans.
3 – Refinance your loans
Student loan refinancing is done through a private lender and can include both federal and private student loans. Private refinancing results in a completely new loan with new terms and a new interest rate. By doing so, you can get a lower rate, which will mean lower monthly payments. If you’re not sure how refinancing works, read our complete guide on private vs. federal student loan consolidation.
Hire a student loan lawyer
If you’ve already gone into default and need help, consider hiring a student loan lawyer or a student debt settlement company that can negotiate settlements with the lenders to lower the amount of the loan.
But whatever you do, don’t ignore your student loans. Figure out a way to make payments and move into the future with a healthy credit score and fewer worries.
Refinancing can help you avoid the consequences of ignoring your payments altogether.
To get started on a refinance, review all the top lenders and make a side-by-side comparison to find the best one for you.