Taking out student loans has become commonplace for many American students. Currently, more than 44 million borrowers are estimated to owe $1.5 trillion in student loan debt, and that debt has continued to rise since 2013, Forbes reported. Many students currently enrolled in classes might not be thinking about the repayment that comes after graduation, but understanding the facts about student loans is the first step in securing a post-graduation financial future that isn’t riddled with debt.
Once you’ve tossed your cap and said farewell to your educational home away from home, you’ll traditionally have a grace period — a segment of time where you don’t have to pay — before the student loan bills begin to arrive. The length of a grace period is dependent on your lender, but unfortunately, this term of non-payment won’t last forever. Before your first bill due date arrives, you’ll want to educate yourself on what’s ahead, and begin making preparations to pay back your debt.
Student Loan Hero reports that 1 out of 10 borrowers incorrectly believe that if you can’t find a job after college, you don’t have to begin paying back your student loans. Don’t allow yourself to be misinformed, because without paying back your student loans, you could face detrimental short and long-term financial consequences.
To put it simply, Julia Wang, vice president of content at ValuePenguin, noted that “nothing good happens,” from not paying your student loans. Ignoring bills might seem like a temporary solution, but regardless of whether you have federal — given out by the government — or private — given out by banks, credit unions, state-affiliated organizations — loans, you are responsible for paying off that debt.
What happens in the short term...
The financial decisions you’re making as a post-graduate can have a huge impact on your future. As Wang said, interest still accrues on your student loans, even when you decide not to pay. Interest can make the loan amount you owe much larger than what you originally took out, and your decision to forgo payment could impact your credit score for years to come.
“Not paying your student loans completely tanks your credit score,” Wang said. “That stays on your credit history report for seven years, and later, when you’re ready to buy a house or car, it makes it difficult to get credit.”
Borrowers who only miss a payment by a month won’t face these consequences, Wang explained. “However if you’re still missing payments after 60 to 90 days, that’s when it will raise a red flag with your lender, and we recommend you contact your loan officer beforehand to tell them what’s going on.”
And the long term
Those who default on their loans — which happens after not paying a federal or private loan for 270 days — can face the most severe consequences, including garnished wages, the potential loss of social security benefits, the loss of potential loan repayment plan options and a hold on your tax refund and federal benefits. In some cases, the entirety of your unpaid loan could be due immediately.
Federal student loan holders that default on their student loan debt can also be taken to court at any time, Wang warned. As for private student loan holders, these individuals have a window of time, called a statute of limitation — which is determined by the state in which their loan was taken out — in which they can be taken to court.
Even if a statute of limitation expires, you still face consequences for not paying your student loans. “In the end, it doesn’t really work out in the borrower’s favor, because lenders have many ways to try and collect the money that’s owed,” Wang said.
In some cases, private lenders can potentially sell your loan to a debt collector, which Wang warns could lead to a lifetime of potential phone calls to your home, family, friends, and place of work. Student Loan Hero also notes that the statute of limitations can reset if you do make later payments.
If you have concerns about being able to pay off your student loans, Wang recommends contacting your loan service provider to explore potential repayment plans and a consolidation of your student loans.
These potential consequences may seem terrifying, but with preparation, you can begin planning for paying back your student loans as soon as you sign for them. “Do the research into what kind of loan you’re taking out,” Wang said. “You really want to understand how the loan is structured, and what you’re responsible for paying for.”