Here's What Happens—and What to Do—If You Can't Pay Your Federal Student Loans

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Student debt relief has helped millions of Americans during the pandemic. Since March 27, 2020, federal student loan interest rates have been set to 0% and payments have been paused. 

But the policy is currently set to expire on Oct. 1, 2021, and many borrowers are still struggling financially, leaving many to wonder: What happens if I can't make my student loan payment? 

Private student loans do not have federal protections and have specific contracts that dictate the consequences of missing a payment. However, the consequences for missing federal student loan payments often follow a common pattern.

Here is a step-by-step guide of what happens when a borrower misses a federal student loan payment: 

After graduation

Federal student loans go into repayment when a borrower graduates or leaves school. However, most federal student loan borrowers are given a grace period

Borrowers with Direct Subsidized, Direct Unsubsidized or Federal Family Education Loans are given a six-month grace period before they are expected to start making payments. 

Borrowers with Perkins Loans are given a nine-month grace period. 

After the grace period, borrowers are expected to make regular payments in accordance with their selected repayment plan

15 days after payment is due

Persis Yu, director of NCLC's Student Loan Borrower Assistance Project says that most federal student loans give borrowers a roughly 15-day grace window after their regular due date to make a payment. This means if you are less than 15 days late making a federal student loan payment, there will likely be few consequences. 

However, if a borrower has not made a payment after this window ends, their loans will be considered delinquent and can begin to impact borrowers' credit scores which can have significant long-term consequences such as making it more difficult to buy a car or a home. Bad credit can also impact work opportunities when an employer does a credit check.

"But at that point, you still have some time to get back on your feet. You can still make a payment and then get back on track," says Yu. "The really really bad things don't start happening until a little later."

270 days after payment is due

After 270 days, federal student loans go into default. Once federal student debt is in default, the government is able to garnish borrowers' wages, Social Security checks, federal tax refunds and disability benefits. In some states, borrowers with defaulted student loans can have their professional licenses revoked as well as their driver's licenses

"Private lenders have to get a court order before they can garnish your wages. The Department of Education doesn't have to do that," says Ashley Harrington, federal advocacy director and senior counsel at the Center for Responsible Lending. "They just have to send you a notice 30-days before the garnishment starts and give you the opportunity to request an appeal." 

"The government has extraordinary collection powers under the umbrella of the Debt Collection Improvement Act," says Yu, listing all of the different ways the federal government can collect on missed student loan payments. "The most common collection activity is that folks will have any tax refunds seized. When Social Security benefits or wages are garnished, they will typically take roughly 15% of those payments, but for the tax refunds, they actually will seize the entire amount."

She adds that garnishing tax refunds such as the Earned Income Tax Credit can have a harsh impact on families and children.

"There's a significant amount of research that's been done to show that the Earned Income Tax Credit is the most effective anti-poverty measure that we have in this country," says Yu. "And so the impacts of taking this money actually are intergenerational."

Yu adds that borrowers in default "can apply for what's called a 'Post 270-Day Forbearance' in which you can retroactively wipe out [the delinquency]. You have to engage with your servicer and there's a specific form you have to fill out."

One year after payment is due

If a borrower has not made a payment in over a year, federal student loans will often be transferred to a default collection agency, says Harrington. 

The Department of Education works with third-party collection agencies who will charge penalties and fees for not making a payment, sometimes as much as 18% of the balance of your loan. 

Collection agencies "harass folks with calls and texts, which can add to the mental stress of the debt," explains Harrington, noting that around this time the impact of default on a borrower's credit would be significant. "Default loans impact your credit score, can limit access to credit and makes credit more expensive overall. That then makes your life that much harder."

At this point, Harrington recommends that borrowers reach out to their servicers to see if they qualify for economic hardship deferment or if they can switch to a repayment plan that works better for them so that they can get back on track. But ultimately, she says some borrowers have their hands tied. 

"Not paying your federal student loans and going into default and delinquency can have really disastrous consequences. Consequences that can make your life harder in numerous ways and we should be clear about that," says Harrington. "But it's also important to note that there are a lot of people who are really struggling and student loan payments are a part of that. Some are not making the decision to not pay their debts, but they have numerous other commitments: they're having to pay rent, we're in a pandemic, there's job losses, there's underemployment, there's child-care needs. There's all these other things that student loan borrowers are dealing with.

"And they need to keep the lights on."

"One of the things that is really unique about federal student loans is that there's no statute of limitations, says Yu. "So the consequences can last for a very long time." 

Fortunately, unlike some private student loans, federal student loans are discharged at death.

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