What happens if you don’t pay your student loans?

By Katie Lobosco, CNN

Washington (CNN) — Student loan payments are due in October for the first time in three-plus years – but for the next 12 months, borrowers will be able to skip payments without facing the harsh financial consequences of defaulting on their loans.

The Biden administration is providing what it’s called an “on-ramp period” until September 30, 2024. During that time, a borrower won’t be reported as being in default to the national credit rating agencies, which can damage a person’s credit score.

Think of it as a grace period for missed payments. But interest will still accrue, so borrowers aren’t off the hook entirely.

Here’s what borrowers need to know:

Who’s eligible for the ‘on-ramp’ period?

Any federal student loan borrower who was eligible for the pandemic-related payment pause, which took effect in March 2020, is eligible for the “on-ramp” period. That includes borrowers with federal Direct Loans, Federal Family Education Loans and Perkins Loans held by the Department of Education.

Borrowers don’t need to apply for the benefit.

What normally happens when you miss a payment?

Normally, a federal student loan becomes delinquent the first day after a payment is missed. Loan servicers will report the delinquency to the three national credit bureaus if a payment is not made within 90 days.

A loan goes into default after a borrower fails to make a payment for at least 270 days, or about nine months, which can result in further financial consequences.

A default can further damage your credit score, making it harder to buy a car or house. It could take years to establish good credit again. Borrowers could also see their federal tax refund or even a portion of their paycheck withheld.

Once in default, the borrower can no longer receive deferment or forbearance and would lose eligibility for additional federal student aid. At that point, the loan holder can also take the borrower to court.

What are the consequences of a missed payment during the ‘on-ramp’?

Because the pandemic payment pause has ended, interest restarted accruing on September 1 after interest rates were effectively set to 0% for three-plus years.

That means if a borrower misses a payment now, he or she could end up owing more debt over time due to interest.

As interest builds up, a borrower’s loan servicer may also increase monthly payment amounts to ensure the debt is paid off on time. (This won’t happen to borrowers enrolled in income-driven plans, which calculate payments based on income and family size.)

And unlike during the pause, a missed payment means that a borrower will miss out on a month’s worth of credit toward student loan forgiveness under certain repayment plans.

For borrowers enrolled in the Public Service Loan Forgiveness program, for example, each month during the pause still counted toward the 120 monthly payments required to be eligible for debt forgiveness.

Lower payment options could be available

Before missing a payment, it might be worth considering switching into an income-driven repayment plan that could lower monthly payments.

A new income-driven repayment plan launched this summer, called SAVE (Saving on a Valuable Education), offers the most generous terms and will likely offer the smallest monthly payment for lower-income borrowers.

Under SAVE, a single borrower earning $32,800 or less or a borrower with a family of four earning $67,500 or less will see their payments set at $0.

Borrowers can apply for a new repayment plan whenever they want, for free, but should allow at least four weeks for the change to take effect.

What happens to loans already in default?

Borrowers who fell into default before the pandemic pause started in March 2020 can apply for the Department of Education’s “Fresh Start” program.

If borrowers use Fresh Start to get out of default, their loans will automatically be transferred from the Department of Education’s Default Resolution Group to a loan servicer and returned to an “in repayment” status, and the default will be removed from their credit report.

To claim these benefits, log in to myeddebt.ed.gov or call 800-621-3115. The process should take about 10 minutes, according to the Department of Education.

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