Q: What happens if you can't pay student loans?

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Stanley tate

Student Loan Lawyer

$400M+ student loans managed

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When you can't pay your student loans the natural tendency is to feel embarrassment or as if you're a failure.

Don't do that.

You're not a failure.

And it's not embarrassing to have difficulty paying the massive amount of student loan debt you have.

Not in this economy.

Not in this student loan market where schools raise their tuitions higher and higher, and lenders charge ridiculous interest rates.

It's only natural, give those circumstances, for you to have trouble affording your student loan payments.

So what do you do?

In this post, that's the question I'll answer for you.

1. What to Do When You Can’t Pay Your Federal Student Loans

The answer is easy for federal student loans:

When you can’t make your payment, get out of a standard repayment plan and into an income-driven repayment plan. (Just don't choose the income-contingent repayment plan; it's the absolute worst.)

An IDR plan is based on your adjusted gross income and family size, which, in turn, gives you your discretionary income. Your discretionary income is the amount the federal government says you have available to pay back your student loans.

And if your payment amount is too high, first, check to see what type of loans you have.

If you have Federal Family Education Loans, look into loan consolidation. By consolidating, you'll convert your FFEL loan into a Direct Consolidation Loan. And that will make you eligible for a better student loan repayment plan, like the Revised Pay As You Earn plan.

Related: See What Type of Federal Student Loans You Have

Second, see if you can lower your payment because your income has significantly changed since you supplied your income information. If it has, submit a new IDR application with proof of what you're currently earning.

If that doesn’t work, you can ask for an Alternative Repayment Plan (Direct Loans) or Income-Sensitive Repayment Plan (FFEL loans).

Neither plan is considered a qualifying payment for student loan forgiveness under the Public Service Loan Forgiveness program. You'll have to be on a type of income-based repayment plan to qualify for PSLF.

Both plans can get you a payment based on your income and your living expenses, the latter of which is something that neither the REPAYE, nor the PAYE, nor the IBR plan take account of.

Related: Best Repayment Plan for Student Loans: How to Choose

Of course, if you’d rather avoid paying anything or dealing with the hassle of getting into one of those plans, request a loan deferment or forbearance for economic hardship, financial hardship, or some other reason.

Be mindful though.

When you place a loan on deferment or forbearance the interest that accrues can be capitalized. Interest capitalization is the most common reasons I see in borrower's education debt doubling and tripling over time.

2. What to Do When You Can’t Pay Your Private Student Loans

This is tricky.

When you can no longer pay your private loans, your options are few.

You can ask your loan holder for a student loan forbearance or deferment. But soon, that deferment period will end.

And then what?

You can ask for repayment options that offer a lower payment, loan modification, lower interest rate reduction, or some other type of relief. But soon, those terms run out.

When those repayment periods end, what are your options?

You can look into refinancing, but you may be hard pressed to find a lender willing to refinance your loan balance.

So what do you do then?

At that point, it’s arguable that your decision has been made for you:

Default on your private student loan and try to negotiate a settlement.

Related: What I Learned Settling $1 Million in Federal and Private Student Loans

Some folks refer to this as a strategic default. But that’s inaccurate.

There’s nothing strategic about being unable to afford your student loan payments.

That’s just simple math.

If you could earn more, you would.

As for your expenses, you’ve likely already cut those damn near to the bone. And even if you cut any more, what difference is the money you spend on Netflix or your latte going to make to the daily interest rate that accrues on your loan?


So, yeah, your decision has been made for you.

3. What Happens When You Can't Pay Federal Student Loans

Here are the consequences when you can't pay federal student loans:

  • Administrative wage garnishment (no need for a court order)
  • Tax refund offset
  • Negative credit reporting
  • Phone calls and letters from creditors
  • Potential creditor harassment
  • No longer eligible for federal financial aid like grants and Direct Plus loans

4. What Happens When You Can’t Pay Private Student Loans

Here are the consequences of defaulting on private student loans:

  • Negative credit reporting for you and consigner
  • Phone calls and letters from creditors
  • Potential creditor harassment
  • Lawsuit, judgment, wage garnishment, bank account levy
You see what’s absent from this list? Jail. You can’t go to jail for not paying your student debt. You can, however, be jailed for not obeying a court order related to a judgment against you for a student loan. Moral of the story? Follow court orders.

If you’re worried about having your wages garnished for your student loans, stop.

Your wages can't be garnished for a private student loan until after you’ve been sued and a judgment has been entered against you.

Private lenders need a court order to garnish your wages and levy your bank accounts.

So if your employer says that you’re about to be garnished for a student loan and you haven’t been sued, it’s a federal student loan.

5. How Does Student Loan Default Affect Your Credit Score

Let’s back up to make sure we understand student loan default because it’s different for federal loans and private loans.

With federal student loans, the U.S. Department of Education won't mark your loan in default until after you’ve gone more than 270 days without making a required monthly payment.

You’ll default on private loans much quicker. Many private lenders place your loan in default after one missed monthly payment.

Now that we’re clear on when you default, we can answer how does student loan default affect your credit.

For starters, a student loan default affects your credit by reporting your late payment history to the credit reporting bureaus. This negative history will drop your score.

But when do loan servicers actually report late payments?

Again, the answer depends on whether it’s a federal or private loan.

Federal loan servicers wait until you’ve missed 3 months (90 days) of payments before they report the late payment history. Private lenders, on the other hand, sometimes report the late payment history the month after you miss a payment.

Another way student loan default affects your credit happens when your loan is declared in default. At that point, not only will you have the late payment history, but also the loan status on your credit report will indicate the loan is in default.

So how do you fix the damage student loan default has wrecked on your credit score?

Get out of default quickly.

6. Why Can’t I Pay My Student Loans With a Credit Card

Having trouble paying your student loans and want to use your credit card?

Good luck.

Many of the federal government's loan servicers don’t accept credit card payments online. Some, however, have been known to accept credit card payments made over the phone.

Here are two reasons why you can’t pay your student loans with a credit card:

  1. Credit card companies don’t want to rack up a lot of points paying off your student loans with your card.
  2. They don’t want you to turn your nondischargeable student loan debt into credit card debt, which can be wiped out in bankruptcy.

If you’re set on using a credit card to pay your student loans, you’ll need a third-party bill payment service like Plastiq.

These third-party bill payer services typically charge a transaction fee. Usually, the fee is somewhere around 3% of the transaction.

Could you pay off your student loans with your credit card or bill payer service and then discharge that debt in bankruptcy? Possibly. Some courts have taken the position that when you refinance student loan debt — that’s what you’re doing when you pay your loans with a credit card — it’s still a student loan for bankruptcy purposes.

7. Do Student Loans Ever Go Away

Thinking of never paying your student loans back?

For many of you, student loan debt will follow you to your grave. And that’s true no matter if your loans are federal or private.

Let me explain.

Federal student loans don’t have a statute of limitations.

Back in the 70's, Congress changed the laws so the only way your federal loans will go away is if:

Federal student loans will go away when:

  • You pay them off
  • You get them forgiven
  • You die or
  • You discharge them in bankruptcy

Private student loans, on the other hand, are subject to statute of limitations.

Which statute of limitations your private loan is subject can be a tough question.

Is it where you live? The state you were in when you borrowed the loan? The state where the headquarters from your private lender is at? Or is it the state listed in your promissory note?

The answer depends on a host of factors that go beyond the scope of this post.

Speak with a student loan lawyer near you to find out more.

Finally, know this:

Student loan borrowers rarely get out of paying their loans because of statute of limitations.

There’s almost always some action — payment, forbearance, bankruptcy, something — that causes the SOL to extend.

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Stanley Tate outside in snow.
Hey, I’m Tate.

I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

Read a bit about me & how I got started with student loans.

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