Introduction
Graduating from college comes with a sense of accomplishment and newfound opportunities, but also with a significant financial burden: student loans. With the average graduate student in the United States leaving school with $30,000 in loans, it can be challenging to make ends meet while also keeping up with the monthly payments. But what happens if you can’t pay your student loans? What follows are the consequences that are encountered when you do not pay student loans.
The consequences of defaulting on your student loans: What you need to know
One thing that many people do not fully understand about student loans is what it means to default on them. When you miss a payment, you are considered delinquent on your loan. After ninety days of missed payments, you’re typically considered in default. Once in default, the consequences can be severe and long-lasting.
The most immediate consequence of defaulting is the garnishment of wages. This means that a portion of your paycheck is seized before it even gets to you and is sent to your loan servicer. This can put a significant strain on your finances and make it hard to get by.
Other consequences include legal action taken against you, damage to your credit score, and difficulty obtaining future loans. Legal action can include wage garnishment, the freezing of your bank account, and seizure of property.
Finally, when you default on a student loan, it becomes more challenging to take out loans in the future, such as those for mortgages or car payments.
How missed student loan payments can affect your credit score
A credit score is a measure of how likely you are to repay loans on time. The score ranges from 300 to 850, with higher scores being more favorable. Your credit score is calculated based on many factors, including your payment history, debt-to-income ratio, and the length of your credit history.
When you miss student loan payments, your credit score will be negatively affected. This happens because payment history makes up a significant portion of your total credit score. The longer you go without making payments, the more damage is done to your credit score.
The impact of missed student loan payments on your credit score can last for years. Even after you catch up on payments, it will still likely take several years for your credit score to fully recover. However, there are some steps you can take to improve your credit score even after missing payments. These include paying down outstanding debt, making timely payments on all current loans, and checking for and disputing any errors on your credit report.
The legal ramifications of not paying off student loans
When it comes to student loans, there are several stages of default, each with its legal actions. First, as mentioned earlier, when you miss a payment you are considered delinquent. After the ninety-day mark, your loan is considered in default, and the following items begin to happen:
- Your loan servicer can notify credit bureaus of the late payment, which will negatively impact your credit score.
- Your entire loan balance becomes due immediately.
- Collection agencies can be employed to collect the debt, and wage garnishment can begin.
- Your tax refunds can be seized to repay your debt.
These legal actions can result in the seizure of assets as well as wage garnishment. It’s essential to remain in touch with your loan provider and offer an alternative payment arrangement if need be. If avoided, these actions can stay on your credit report for seven years after your default has been resolved.
The impact of unpaid student loans on your future finances
Defaulting on your student loans can damage your credit score as well as future financial decisions such as buying a house or car. When applying for a loan, a low credit score could result in higher interest rates or being outright denied credit. Employers may also review credit reports when checking for potential new hires or considering to promote current employees.
While job applications cannot be denied solely based on bad credit scores, a continuing negative trend of unpaid student loans can show a lack of responsibility and thus affect future opportunities.
What happens to your tax refunds if you don’t repay your student loans
It’s crucial to understand that the government can garnish your tax refunds to repay your student loans. If you file a joint tax return with your spouse, it’s also essential to note that their portion of the tax refund can also be withheld if they are not the loan borrower. If you want to avoid having your tax refund seized, you need to address your student loans and set up alternative arrangements.
Luckily, there is a way for you to receive your full refund. If you can reach an agreement with the loan servicer before you file, the government will not take your refund.
The hidden costs of ignoring your student loan debt
One of the most significant hidden costs of ignored student loan debt is the accumulation of interest. As time goes on, the amount you owe can accumulate in both interest and fees, making it even more challenging to pay back.
Additionally, there is a fee for when your loan enters default. On top of the added interest, these fees can add up, making it harder to get back on track.
Conclusion
Unpaid student loan debt can have devastating and long-lasting consequences that stretch through every aspect of a person’s financial life. The effects include wage garnishment, legal action, and damage to credit scores. The impact on a person’s financial future is significant, considering that missed student loan payments can affect future decisions regarding purchasing a home, a car, and even their employment. There are often alternatives available, such as deferment or forbearance. There are also different repayment options, including the possibility of income-based repayment plans. Anyone struggling with student loan debt should know that it is never wise to ignore the payments because the cost can be too high.
