Student debt relief has helped millions of Americans during the pandemic. Since March 27, 2020, federal student loan interest rates have been set to 0% and payments have been paused.
But the policy is currently set to expire on Oct. 1, 2021, and many borrowers are still struggling financially, leaving many to wonder: What happens if I can’t make my student loan payment?
Private student loans do not have federal protections and have specific contracts that dictate the consequences of missing a payment. However, the consequences for missing federal student loan payments often follow a common pattern.
Here is a step-by-step guide of what happens when a borrower misses a federal student loan payment:
After graduation
Federal student loans go into repayment when a borrower graduates or leaves school. However, most federal student loan borrowers are given a grace period.
Borrowers with Direct Subsidized, Direct Unsubsidized or Federal Family Education Loans are given a six-month grace period before they are expected to start making payments.
Borrowers with Perkins Loans are given a nine-month grace period.
After the grace period, borrowers are expected to make regular payments in accordance with their selected repayment plan.
15 days after payment is due
Persis Yu, director of NCLC’s Student Loan Borrower Assistance Project says that most federal student loans give borrowers a roughly 15-day grace window after their regular due date to make a payment. This means if you are less than 15 days late making a federal student loan payment, there will likely be few consequences.
However, if a borrower has not made a payment after this window ends, their loans will be considered delinquent and can begin to impact borrowers’ credit scores which can have significant long-term consequences such as making it more difficult to buy a car or a home. Bad credit can also impact work opportunities when an employer does a credit check.
“But at that point, you still have some time to get back on your feet. You can still make a payment and then get back on track,” says Yu. “The really really bad things don’t start happening until a little later.”
270 days after payment is due
After 270 days, federal student loans go into default. Once federal student debt is in default, the government is able to garnish borrowers’ wages, Social Security checks, federal tax refunds and disability benefits. In some states, borrowers with defaulted student loans can have their professional licenses revoked as well as their driver’s licenses.
“Private lenders have to get a court order before they can garnish your wages. The Department of Education doesn’t have to do that,” says Ashley Harrington, federal advocacy director and senior counsel at the Center for Responsible Lending. “They just have to send you a notice 30-days before the garnishment starts and give you the opportunity to request an appeal.”
“The government has extraordinary collection powers under the umbrella of the Debt Collection Improvement Act,” says Yu, listing all of the different ways the federal government can collect on missed student loan payments. “The most common collection activity is that folks will have any tax refunds seized. When Social Security benefits or wages are garnished, they will typically take roughly 15% of those payments, but for the tax refunds, they actually will seize the entire amount.”
She adds that garnishing tax refunds such as the Earned Income Tax Credit can have a harsh impact on families and children.
“There’s a significant amount of research that’s been done to show that the Earned Income Tax Credit is the most effective anti-poverty measure that we have in this country,” says Yu. “And so the impacts of taking this money actually are intergenerational.”
Yu adds that borrowers in default “can apply for what’s called a ‘Post 270-Day Forbearance’ in which you can retroactively wipe out [the delinquency]. You have to engage with your servicer and there’s a specific form you have to fill out.”
