Student debt relief has helped millions of Americans during the pandemic. As of March 27, 2020, federal student loan interest rates have been set at 0% and payments have been suspended.
However, the policy currently expires on October 1, 2021 and many borrowers are still facing financial problems leaving many wondering, what if I cannot make my student loan payment?
Private student loans have no federal protection and specific contracts that determine the consequences of missing payment. However, the consequences for missing federal student loan payments often follow a common pattern.
Here’s a step-by-step guide to what happens if a borrower misses a federal student loan payment:
After graduation
Federal student loans are repaid when a borrower graduates or leaves school. However, most federal borrowers are given a grace period.
Borrowers with directly subsidized, directly unsubsidized, or federal family education loans are given a six-month grace period before they are expected to make payments.
Borrowers with Perkins loans are given a nine month grace period.
After the grace period has expired, borrowers are expected to make regular payments according to their selected repayment schedule.
15 days after receipt of payment
Persis Yu, director of the NCLC Student Loan Assistance Project, says most federal student loans give borrowers around 15 days after their regular due date to make a payment. This means that if you are less than 15 days late to make a federal student loan payment, there are likely to be few consequences.
However, if a borrower has failed to make a payment after this window has expired, their loans are considered defaulted and can affect borrowers’ creditworthiness, which can have significant long-term consequences, such as: B. the difficulty of buying a car or a car at home. Bad credit can also affect job opportunities when an employer does a credit check.
“But at this point you still have some time to get back on your feet. You can still make a payment and then get back on track,” said Yu. “The really, really bad things don’t happen until a little later.”
270 days after receipt of payment
After 270 days, federal student loans default. Once federal student debts are past due, the government can collect borrowers’ wages, social security checks, federal tax refunds, and disability benefits. In some states, borrowers with defaulted student loans can have both their professional licenses and driver’s licenses revoked.
“Private lenders need to get a court order before they can garnish your wages. The Department of Education doesn’t have to do that,” said Ashley Harrington, federal prosecutor and senior counsel at the Center for Responsible Lending. “All they have to do is send you a notice 30 days before the seizure begins and give you the opportunity to appeal.”
“The government has exceptional debt collection powers under the Debt Enhancement Improvement Act,” says Yu, listing the various options the federal government can collect on missed student loan payments. “The most common collection activity is confiscating tax refunds. When social security benefits or wages are garnished, they typically take about 15% of those payments, but for tax refunds they actually confiscate the entire amount.”
She adds that cashing in tax refunds like the Earned Income Tax Credit can have a powerful impact on families and children.
“A lot of research has been done to show that the earned income tax credit is the most effective poverty reduction tool we have in this country,” said Yu. “And so the effects of ingesting this money are actually cross-generational.”
Yu adds that by default, borrowers “can apply for a so-called” Post 270-Day Forbearance, “which can be retrospectively wiped out [the delinquency]. You need to contact your servicer and there is a specific form that you need to fill out. “
One year after receipt of payment
Often times, when a borrower hasn’t made a payment in more than a year, federal student loans are turned over to a standard debt collection agency, Harrington says.
The Department of Education works with third-party debt collection agencies who impose penalties and fees for non-payment, sometimes up to 18% of the balance of your loan.
Debt collection agencies “bother people with calls and texts, which can add to the psychological stress of the debt,” said Harrington, noting that at this time of year, the impact of default on a borrower’s credit would be significant. “Standard loans affect your creditworthiness, can limit access to credit and make loans more expensive overall. That makes your life much more difficult.”
At this point, Harrington recommends borrowers reach out to their servicers to see if they qualify for an economic hardship postponement or if they can switch to a repayment plan that works better for them to get them back on track . But ultimately, she says, some borrowers have hands tied.
“Failure to pay your federal student loans and default and default can be truly catastrophic. Consequences that can make your life difficult in a number of ways, and we should be aware of that,” says Harrington. “But it’s also important to note that there are many people who are really struggling and student loan payments are a part of it. Some don’t make the decision not to pay their debts, but they have numerous other obligations: It’s you, we have to rent We are in a pandemic, there are job losses, there is underemployment, there are childcare needs, there are all of these other things that student loan borrowers are dealing with.
“And you have to stop the light.”
“One of the things that is really unique about federal student loans is that there is no statute of limitations,” says Yu. “So the consequences can last a very long time.”
Fortunately, unlike some private student loans, federal student loans are repaid on death.
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