What happens if I don’t pay off my student loans?

More than 1.1 million Americans defaulted on their federal student loans for the first time last year. When you fail to repay federal student loans, the consequences are serious and can affect many areas of your life. You may experience consequences that include:

  • Wage bill: The Department of Education can garnish up to 15 percent of your disposable salary. Unlike private collectors, the Department of Education does not need a lawsuit to garnish your income.
  • Your balance increases: Your remaining balance is due immediately once you default. Unpaid interest and collection fees may also be added to your balance. The latter is especially true for borrowers with FFEL loans.
  • Reduced credit score: Loan servicers will inform all three credit bureaus if your loans are delinquent for too long. The three credit bureaus are also reported after default. This can significantly lower your credit score. Having a low credit score can make it difficult to obtain employment, housing, or other lines of credit.
  • Lose eligibility for financial aid: You are not eligible for federal funding while your loans are delinquent. Defaulting on your loans can cause problems if you plan to go back to school.
  • Lose eligibility for payment plans: One of the main benefits of most federal student loans is that you can take advantage of income-based repayment plans. You lose these options after defaulting on your student loans. Plus, you no longer qualify for hardship deferrals or forbearance.

Can I cancel my student loans?

Depending on your situation, your federal student loans may come out of default. Borrowers generally have two options available: the Department of Education loan rehabilitation program or converting their loans to a Direct Consolidation Loan. Both options may have pros and cons depending on your individual situation.

If you choose loan rehabilitation, you must make nine monthly payments within 20 days of the due date for 10 consecutive months. For Perkins loans, the requirement is nine payments over nine consecutive months. You can only use the loan rehabilitation program once. Once your loans are paid off, you can qualify for helpful repayment programs. Additionally, the records of the default are removed from your credit report.

Your second option is to consolidate your delinquent loans into a Direct Loan Program Consolidation Loan. This will consolidate your loans into a single loan with a fixed interest rate. By consolidating your loans, you can come out of default in a period of weeks instead of months. However, you can pay more over the life of your loan if your previous interest rate was lower.

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