You’re struggling. You’re not earning any money. You can’t pay the rent, which means that there’s no way you can pay your student loans, either. But is it a good idea to stop paying your student loans? Probably not.
But should you simply stop paying your student loans when you can’t afford them?
Here are some options to consider before you stop paying back your student loans.
What Can Happen if You Simply Stop Paying (Without Doing Anything Else)
One of the worst choices that you can make is to stop paying loans altogether without doing anything else. When you cease repayment, you face financial penalties. These penalties can vary between federal student loans and private ones.
The “head in the sand” option—more or less ignoring student loans in that hope they’ll go away—likely won’t work, either.
Your loans become delinquent as soon as your payments are even a day late. After falling behind 90 days on payments, a loan servicer will report your delinquency to the three major credit bureaus. This report can affect your ability to sign up for utilities, get insurance, obtain a cell phone plan, and pass a credit check when you need to lease an apartment.
Default and Collections
Your loans end up in default when your payments become 270 days overdue. In this case, you’re massively late on your loan payments, so your loans enter the next phase.
In default, the full balance of your loans becomes due immediately. If you can’t pay—and most debt holders can’t—your loans may go to collections.
If your loans are in collections, your lender or servicer has passed your debt onto someone else in an attempt to collect the money owed.
For federal loans, the collections agency may pile on fees to your student loans. These fees can be around 20% of your total loan balance, though some reports put them as high as 40%.
With added fees, the government will take more aggressive action to attempt to collect the money from you. A few things that could happen:
- You could be sued. You may be taken to court in an attempt to get you to pay your debt.
- Your wages could be garnished. The government can intercept up to 15% of your disposable pay before you’re even able to touch your paycheck.
- Your tax refund could be intercepted. That’s right: no more money back from the government until your loans are paid.
- In addition to the additional fees, your credit could be utterly destroyed. (Yes, student loans affect your credit score.) Late payments, loans in collections, defaults, and more can ruin your credit score.
If you have a cosigner, their credit will take a hit, too.
When You Should Stop Paying Student Loans
The decision to stop paying your student loans isn’t one to be considered lightly. But some have argued that there are some cases in which you simply shouldn’t pay them back.
In an article on The Huffington Post, writer Steve Rhode lists situations in which you shouldn’t pay back private loans, such as when you can’t save an emergency fund or for retirement.
I’m not so sure that I agree with this claim, for the consequences of not repaying might be worse. If you’re young and stop paying your loans, you can cripple your credit score and ruin any chance of getting a mortgage or other loan for a long time. While you might accept this prospect, going down this path takes serious consideration.
In many cases, your loans simply aren’t going to go away. Instead, it’s often best to explore all other options first.
How to Stop Paying Student Loans
There are options that can postpone your repayment of student loans before you decide to just simply stop paying without taking further action. While none of these options are guaranteed to work, they can be worth asking your servicer about.
The following are the most common options.
Deferment means that you’ve stopped making payments and that you’re not responsible for paying interest charges on subsidized loans, either. This includes Federal Perkins Loans, Direct Subsidized Loans, and Subsidized Federal Stafford loans.
Deferment is only available in select cases.
If you’re unemployed and can’t find a full-time job that allows you to pay off your student loans, then you may be eligible for deferment.
You may also be eligible in a time of economic hardship, which includes serving in the Peace Corps.
There are other cases that apply, too, including if you’re serving or have recently served in the military, if you’re still enrolled in college classes at least half-time, or if you’re participating in a qualifying fellowship program.
Deferment is available for an indefinite period in all cases except those of unemployment and economic hardship. For these two cases, you’re limited to three years.
Deferment is not available for private student loans.
If you’re not eligible for deferment, then you may still be eligible for forbearance.
Forbearance is nearly the same as deferment with one key exception: student loan interest will continue to accrue on all loans, subsidized or not.
For federal student loans, forbearance cases are separated into two categories: discretionary and mandatory.
Discretionary cases include financial hardship or illnesses. For discretionary forbearance, it’s up to your servicer to grant forbearance.
For mandatory cases, servers must grant forbearance if you meet the criteria. Mandatory forbearance situations include that:
- Your loan payments are 20% or more of your gross income.
- You’re a professional in the education field and qualify for student loan forgiveness for teachers.
- You’re serving in a national service position, such as AmeriCorps.
- You’re serving in a medical or dental internship or residency program.
For private student loans, forbearance may not be available. It depends on your lender, so there are no guarantees.
See our post on student loan forbearance and deferment to learn more about these options.
You may have heard that discharging student loans in bankruptcy is impossible. But this isn’t entirely true. A student loan bankruptcy study conducted by Jason Iuliano, a political science doctoral candidate at Princeton, found that nearly 40% of debtors who request student loan discharge in bankruptcy have had their loans fully discharged.
However, this is far from a sure bet. Most people included in the study who were able to have loans discharged had a combination of medical hardship, unemployment, and/or low income.
For this reason, there may be only certain cases in which you’d want to seek discharging your student loans in bankruptcy.
Have you ever considered stopping student loan payments? What did you decide to do?
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