What happens if I can’t pay my student loan on time?

Question: “I am currently paying back a federal student loan (Stafford). I recently lost my job, and I’m seeking new employment. There’s a chance I will miss some of my loan payments during this transition. What happens if I can’t pay my student loan on time? What kinds of consequences are there? Thanks for your help.”

They will come for you at night, under cover of darkness. They will take you to a remote location where you will be processed and trained for military service. You will have to serve in that role until you have paid off your debts.

Okay, not really. The truth is less exciting, but there are still consequences. If you can’t pay your student loan debt on time, the federal government may use one of several strategies for recouping the loss. Here are some of the most common strategies:

They can collect what you owe through your tax returns.
They can garnish your wages for the amount owed.
They can tap your federal benefits, such as social security.
They can sue you in a court of law.

When You Can’t Pay on the Loan

If you can’t pay your student loan, the IRS can actually “intercept” some or all of your income tax returns, until your paid up on the loan. The IRS is a branch of the federal government, and you have a Stafford loan that is guaranteed by Uncle Sam. So it’s perfectly legal for them to do this. This is the most common strategy used, when people can’t pay on time.

The federal government can also use wage garnishment to recover their losses. This is when they garnish part of your monthly wages / earnings to make up for the student loan payments you’ve missed. There are limits to how much they can take, but this is certainly an option for them.

The Impact on Your Credit Score

A federal student loan is generally offered by a private lender, but insured by the government. So if you fail to pay on time, the lender will likely report the delinquency to the three credit-reporting bureaus (TransUnion, Equifax and Experian). This means the overdue payments will show up in your credit reports, and they stay there for up to seven years. Your credit score largely comes from the information contained within your reports.

What does all of this mean? It means that when you can’t pay your student loan on time, you can also do serious damage to your credit score. This will make it harder to get approved for other loans in the future — especially a mortgage. And if you do get approved for such financing, you’ll end up paying a higher interest rate. With all other things being equal, people with bad credit generally get charged more interest on loans.

How late payments affect your credit score
How does student loan forgiveness work?

This article deals with the question: “What happens if I can’t pay my federal student loan on time?” Please note that this article is not all-inclusive. There is certainly more to learn about the subject. You might even consider getting legal help, if you’re dealing with a large amount of debt.

Low Interest Credit Cards