40% Of Federal Loan Borrowers Missed First Payment After Payment Pause. What Are The Consequences?

When the pandemic-induced student loan payment pause ended in October, most borrowers made their first payment by mid-November—but over 8 million borrowers didn’t, according to data from the Department of Education.

In a December blog post, U.S. Undersecretary of Education James Kvaal wrote that borrowers who didn’t pay may be confused or overwhelmed by the repayment options. Getting ahold of loan servicers to explore those options has also proven difficult, with many borrowers reporting long phone wait times.

Measures are in place to temporarily eliminate penalties for paying late. However, missing payments after the grace period ends could trigger harsher consequences.

What Are the Consequences of Missing Federal Loan Payments?

During a 12-month loan “on-ramp”—a transition period where borrowers are protected from late penalties—missing federal loan payments won’t result in the typical repercussions like negative credit reporting or default. The on-ramp lasts until September 30, 2024.

Despite that benefit, there’s still a financial risk of accruing interest. Interest may still be charged during the repayment on-ramp period, and unpaid interest can increase your balance over time.

Joining the new Saving on a Valuable Education (SAVE) repayment plan could make payments more affordable, possibly lowering what’s due monthly to $0. Moreover, the government covers interest that your monthly payment doesn’t cover on the SAVE plan, which could stop interest from growing your balance.

What Happens If You Don’t Repay Federal Student Loans?

Say you stop making federal loan payments altogether in protest or in hopes that student loan reform measures will eventually pass and wipe out your balance. Not paying after the on-ramp ends can have some major financial implications.

Less Than 90 Days Late

Your loan account is technically delinquent as soon as a payment is late, but paying right away could keep your account in good standing and help you avoid a credit hit.

More Than 90 Days Late

Late payments are typically reported to the main credit bureaus—Equifax, Experian and TransUnion—after three months. “Each loan in arrears gets reported separately, which can significantly impact credit, especially for those with multiple loans,” says Stanley Tate, a student loan lawyer based in the St. Louis area.

More Than 270 Days Late

After nine months of nonpayment, federal student loans can go into default.

According to Tate, consequences of defaulting on a loan can include wage garnishment, Social Security benefit offsets and tax refund offsets. This means the government can take a portion of your income directly from your employer or take part of your tax refund and Social Security benefits to pay your debt.

Loans in default may also no longer qualify for payment relief options like forbearance, deferment and income-driven repayment (IDR) plans.

Can You Settle Federal Loan Debt?

“While it’s possible to settle federal student loan debt, it’s not advisable to strategically default for a settlement,” says Tate. That’s because settlements in federal loans are less favorable compared to private student loans.

A settlement is when a lender agrees to accept less than what you owe to get your delinquent debt off their books. But, since the federal government has multiple modes of collecting student debt, settlement offers tend to be less common or advantageous.

For instance, a typical offer might only shave off 10% of your principal balance and half of the outstanding interest while requiring a lump-sum payment, according to Tate.

So, if you owe $100,000 in principal and $50,000 in interest, you might get a settlement amount of $115,000 to $125,000, which you’d need to pay all at once. “The potential savings are minimal compared to the high consequences of defaulting.”

Loan default can stay on your credit report for up to seven years and significantly affect your credit score. For Tate’s clients who stopped paying on old loans, the decision typically comes back to haunt them later in life when applying for jobs or mortgages.

How To Reverse Default and Wage Garnishments

If you have loans in default, you could take advantage of the Fresh Start Program until September 2024. The program brings loans back into “repayment” status and removes the default from your credit report.

After the Fresh Start Program expires, paying loans in full, negotiating repayment terms, participating in loan rehabilitation or consolidating debt with a direct consolidation loan are other ways you could reverse default or avoid wage garnishment.

What To Do If You Can’t Afford Payments

Borrowers facing financial hardship may qualify for forbearance or deferment. If you can’t afford payments, contact your loan servicer to discuss payment options as soon as you can.

Federal loans also have multiple flexible repayment options. Getting on an IDR plan can reduce your payments to make them manageable, and your balance may be forgiven after 10 to 25 years of paying, depending on the IDR plan.

How To Pay Off Federal Student Loans

Over 43 million borrowers carry $1.6 trillion in federal student loan debt, so if you’re working to tackle a balance, you’re not alone. Follow these general debt repayment steps:

• Organize your statements. Find out your balance and payment for each loan to understand what you owe.
• Develop a monthly budget. Write out your monthly income and expenses to see what money is available to repay debt. Taking on a side hustle or reducing monthly expenses could make more cash available for debt repayment.
• Consider debt consolidation. Consolidating debt with a direct loan consolidation combines multiple federal loans into one loan with one payment that has a fixed interest rate, which makes payments easier to manage.
• Compare repayment options. The StudentAid.gov website has a loan simulator tool to compare repayment plans. The 10-year standard plan is the default plan that pays your loans off the fastest, but there are also extended plans, graduated plans and IDR plans that can make payments more affordable.
• Review forgiveness requirements. Borrowers who teach or work in public service careers may qualify for programs like Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF). Reviewing forgiveness eligibility requirements is worth a shot, even if you’re not sure if you qualify.
• Sign up for autopay. Signing up for student loan autopay can help you avoid late payments. Plus, federal loans may qualify for a 0.25% interest rate discount when you use autopay.