Not paying your student loans? Your earnings could be at risk


By Melanie Lockert

Do you feel like your student loans are an unnecessary burden? Taking up too much of your monthly budget? Student loans can feel like a financial ball and chain. One that you want to escape desperately.

Though it can seem tempting to jump ship and avoid paying, doing so can have dire and lasting consequences.

What happens when you don’t pay back your student loans

If your monthly student loan payments seem out of control, you might decide to just stop paying. After all, what's the worst that could happen? However, if you simply stop paying your student loans it can cost you in a number of ways.

After missing a payment, your loan servicer or lender tacks on late fees. After 90 days of missing a student loan payment, your loan is reported to the credit bureaus as delinquent. At this point, it’s likely your credit is already damaged.

According to a article, “One 90-day late payment will damage your credit for up to seven years. From a scoring perspective, a single 90-day late payment is as damaging to your credit scores as a bankruptcy filing, a tax lien, a collection, a judgment or repossession.”

The damage on your credit score could make it difficult to get approved for an apartment, mortgage, credit card and more. If you do get approved, it could mean paying higher interest rates, which could cost you thousands in the long run. See more about how student loans affect credit scores.

After 270 days, or nine months of not making a payment, your student loans enter default. When your student loans enter default, your entire student loan balance is due in full on the spot.

Your student loans are then acquired by a collection agency and additional fees will continue to be tacked on to your student loan balance. On top of the damage to your credit, there are even bigger consequences that you may be unaware of — your earnings could be at risk.

Your earnings might be at risk

Sure, you could avoid debt collectors, ruin your credit and not make any payments toward your student loans. Even so, you won’t be out of the clear. Your earnings — now and in the future could be at risk.

Borrowers who default on their student loans are at risk of administrative wage garnishment. Wage garnishment is the process of withholding earnings in order to pay back a debt.

In fact, 15 percent of your disposable pay will be taken out to help repay the outstanding debt. This process continues until your debt is paid off.

In addition, as you get older, your Social Security benefits can be garnished, as well. According to a report by the Government Accountability Office, older borrowers who remain in default are subject to 15 percent of their Social Security earnings being withheld. In other words, the money you might rely on in your old age could be diminished. And the change can be significant.

The report noted that for older borrowers with Social Security offsets, their remaining Social Security income was typically less than the federal poverty guideline.

What this means is that your current income, as well as your future Social Security earnings, are at risk of being garnished. Not the whole thing, but 15 percent, which could be a noticeable difference in your earnings.

In short, there’s no real way to simply avoid paying back your student loans. Your earnings can be automatically taken and it’s totally legal. Perhaps you were only 18 when you signed your student loan contract, young and naive, not fully understanding the ramifications of taking out student loans. But that doesn't matter. Either way, your student loans can haunt you and seriously affect your current and future earnings.

How can you avoid this?

As illustrated above, there are serious consequences to not paying your student loans. The effects on your credit and your earnings can be disastrous. However, there are multiple ways to avoid all of this, even if you can’t afford your student loans.

If you're in fear of missing a student loan payment, the first thing to do is contact your lender or loan servicer. If you have federal student loans, you can apply for temporary deferment or forbearance. Additionally, there are income-driven plans that limit your monthly payments to a small percentage of your income. If your income is very low, your monthly payments could be zero dollars. If you have private student loans, there are fewer options available but you should always ask your lender to provide all options.

Final word

Student loan debt has become commonplace today — yet, the burden of payments can feel overwhelming, never ending, and impossible. You might want to bury your head in the sand and avoid them altogether. However, doing so will affect not only your credit but your hard-earned money, as well.

If you’re thinking of not paying back your student loans, think again. If you are currently delinquent on your student loans or in default, talk to your loan servicer immediately to get your repayment status in good standing.

About the Author

Melanie Lockert is a personal finance writer and author of Dear Debt.

Written on January 5, 2017

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