Now that President Biden's student debt forgiveness plan has been ruled a no-go, millions of borrowers must gear up to start repaying their loans once again. And if you're worried about your ability to do so, you're no doubt in good company.
But one thing you don't want to do is default on your student loans. If you do, the following consequences might ensue.
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1. Your credit score could take a massive hit
Any time you don't pay a bill, that delinquency can be reported to the credit bureaus and land on your credit report. Once that happens, your credit score could plummet, making it difficult to borrow money the next time you need to. Or you might get approved to borrow money, but at an exorbitant interest rate.
Now the good news is that the U.S. Department of Education has instructed student loan servicers to not report delinquent payments to the credit bureaus through late September 2024. So if you become delinquent on your student debt later this year, your credit score may not take a hit. (Plus, you're generally not considered to be in default until you reach the 270-day mark.)
But do note that this is a temporary reprieve, and that normally, delinquent student loan payments will show up on your credit report.
2. You could lose eligibility for different protections
Federal student loan borrowers are eligible for certain protections, like forbearance and deferment. And if you have federal student loans, you can also apply for different repayment plans that may be more flexible than your current one. But if you default on your student loans, you might lose eligibility for these programs and protections.
And you could also lose eligibility for future federal student aid, should you need it.3. You could have your wages garnished
Falling behind on student loan debt could result in your wages being garnished. This doesn't mean that the government will be able to seize your entire paycheck and leave you with no money left over to pay your bills. But a portion of it might get taken away to satisfy your debt, leaving you in a serious bind.
4. You could have your tax refund withheld
Just as the federal government is allowed to garnish wages to get repaid on student debt, so too can it seize or withhold tax refunds to get the money it's owed.
You may have already received your tax refund for 2022. But if you default on your student loans going forward, you could risk having future refunds withheld.
Don't let your student loans go into default
If you're at risk of not being able to make your student loan payments, don't just not make them and call it a day. Instead, reach out to your loan servicer and talk things through. This is a good thing to do whether you have federal student loans, private loans, or a combination of both.
Your loan servicer may be able to walk you through different options that prevent you from going into default, such as changing your repayment plan or hitting pause on your payments for a predetermined period of time. The latter option is one you're more likely to be granted if you can show proof of financial hardship.
But either way, options do exist, no matter what type of loans you have. So it's in your best interest to pursue those rather than simply resign yourself to landing in default.
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