Student Loans 2023: What Happens if You Don’t Keep Up With Your Payments?

young couple looking at billing statements with concern in a kitchen

The Biden Administration has extended its student loan payment pause through June 2023. Borrowers still have a few more months left before payments resume, and many are preparing now to start factoring loan payments back into their budgets.

But what happens if you can’t juggle student loans alongside other outstanding expenses? Are there options available to make it easier to balance loan payments and eventually pay off the debt? What happens if you don’t keep up with your payments?

Options if You Fall Behind

Kevin T. Taylor is a financial advisor and managing partner at InSight, a financial planning firm in Boulder, Colorado. As a last resort for borrowers who cannot keep up with federal student loan payments, Taylor said they may put the loans in deferment or forbearance. (Similar options may be available for private student loans, but Taylor said the eligibility and terms may vary depending on the lender.)

Loans that have been deferred or are in forbearance allow borrowers to temporarily stop making payments or reduce their monthly payment amount. However, interest will still accrue on the loans. This increases the overall amount owed by borrowers. 

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Borrowers who default on their student loans face significant short- and long-term impacts. In the short-term, Taylor said your credit score will be negatively impacted. Borrowers may face collection calls, wage garnishment or legal action. In the long-term, borrowers may struggle to take out loans again in the future like a mortgage or car loan.

Defaulting on federal loans means borrowers may lose other benefits. These include eligibility for deferment or forbearance, exploring income-driven repayment plans or loan forgiveness programs.

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How To Keep Up With the Payments

Rather than face the possibility of defaulting on student loans, borrowers who have difficulty keeping up with student loan payments may look into these repayment options.

Explore Income-Driven Repayment Plans

Borrowers with federal student loans may qualify for an income-driven repayment plan. This plan can help make your monthly payments manageable. 

Mick MacLaverty, co-founder and CEO of Highway Benefits, said most income-driven repayment plans typically have the borrower pay around 10% of their discretionary income. Borrowers who want to get on an income-driven repayment plan will need to apply. Keep in mind if you have private loans or defaulted federal loans, you will not qualify for an income-driven repayment plan.

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If you qualify for an income-driven repayment plan, MacLaverty said your payments could change year-to-year depending on your financial situation. Borrowers may have to recertify their income and family size each year to remain on the repayment plan. 

Look Into Loan Forgiveness Programs

Borrowers who work for the government or a non-profit, or have a Perkins loan or other special circumstances, may be eligible for loan forgiveness programs. They may even be able to have their loan discharged. Like income-driven repayment plans, these programs only apply to federal loans and not private loans.

Consider Refinancing

Borrowers who can find a better interest rate and loan terms than their current terms might explore refinancing student debt.

This is a great option for borrowers with private student loans. Those with federal loans may also look into refinancing but will no longer qualify for income-driven repayment plans or loan forgiveness options if they choose this option.

Consider Consolidation

Borrowers with multiple federal student loans might consolidate them into a single federal student loan. Consolidation, MacLaverty said, helps lower total monthly payments and gives borrowers a new interest rate on their loan that is a weighted average of their current rates.

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There are a few caveats involved in consolidating student loans. It may extend the amount of time it takes borrowers to repay the loan. “If you have any unpaid interest at the time of consolidation, consolidating your loans could result in unpaid interest being added to your principal balance, increasing your principal,” said MacLaverty.

Ask Your Employer About Student Loan Repayment Benefits

Borrowers struggling with their loan payments may talk to their employer about offering a student loan repayment benefit.

“Many people aren’t aware their employer can actually contribute up to $5,250 per employee per year to their employees’ student loans, federal or private,” said MacLaverty. “The best part is these contributions are tax-free, meaning employees will not have to pay any income taxes on contributions made to their loans.”

Work With a Financial Professional

These are just a few popular options for borrowers who need assistance keeping up with their student loan payments. Since every borrower’s financial situation is unique, Taylor recommends consulting with a financial advisor or student loan counselor to evaluate your options and determine the best course of action.

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About the Author

Heather Taylor is a senior finance writer for GOBankingRates. She is also the head writer and brand mascot enthusiast for PopIcon, Advertising Week’s blog dedicated to brand mascots. She has been published on HelloGiggles, Business Insider, The Story Exchange, Brit + Co, Thrive Global, and more media outlets. 

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