College | January 3 2024 | Lisa Litant
What you'll learn
When you’re out of school you may think, “I’ve got my college degree…why should I pay back those student loans I took out years ago?” But while ignoring the monthly bills might feel good in the moment, this can have a life-changing impact on your finances. Before you make that serious choice, consider these facts.
When you applied for—and accepted the terms of—your student loans you signed a legal contract (a promissory note). Like with a car lease, credit card, or mortgage, you have a legal obligation to repay what that you’ve received, with interest.
The money you got from those student loans allowed you to attend college and get your degree. That’s why refusing to make loan payments—for federal or private loans—can lead to long-lasting financial issues that may take you years to recover from.
Most loans have late fees that kick in after you’ve missed a payment. As you continue to delay paying, that amount will go up and up. Your loan servicer may even increase your monthly payment to make sure you pay off your loans on time.
When you miss just one payment, your loan will be considered “delinquent.” That means your account (for both federal and private loans) can be reported to the national credit bureaus.
If you still don’t make payments for your loan, your loan will be considered in “default,” a more serious classification. It means you’ve failed to repay your loan. This information will be available to every company you’re requesting credit from (including when you’re applying for a new car loan, a mortgage, rental agreement, and credit cards).
When your loan is in default, you’ll have to pay the entire amount owed, plus fees. The servicer or loan lender can also send your account to collection. For federal loans, the servicer also has the right to take the balance of your payments from your wages (called “wage garnishment”).
A word about why credit is so important…
One source defines credit as a legal “arrangement that allows you to borrow money now and repay it later.” footnote 1 Make payments on time and your credit rating will be higher; be delinquent or in default and you may find it harder (and more expensive) to rent an apartment, buy a car, get a cellphone, put utilities in your name, and even get a credit card. Why more expensive? The better your credit, the lower the interest rate you’ll be offered.
As we mentioned above, if you don’t make payments, your loan servicer(s) can report it to the national credit agencies. And if your credit score goes down, you’ll have to pay more for every loan you take out going forward (if you can get credit at all). There may not be a quick fix…a delinquent account can remain on your credit report for seven years. (A credit report is a detailed summary of your credit history that’s issued by consumer reporting agencies.)
Some other impacts of not paying your loans:
The majority of private student loan borrowers need a cosigner to get a loan approved. This is often a parent or grandparent who believed in your education and took on the financial responsibility so you could get the loan. If you don’t pay, they’ll be stuck making payments themselves. And if they don’t pay, their credit will be damaged.
There’s a difference between having trouble making payments and refusing to make payments. If you’re having financial difficulties, the first thing to do is reach out to your loan servicers. For federal loans, there are income-based repayment plans (like SAVE) that can lower your payments. Private lenders may also have programs that can help you make at least some payments and stay out of delinquency.
Choosing not to pay back your student loans isn’t a decision that should be made lightly; it can have a serious financial impact for many years of your life. Put your finances on a strong foundation and help the future you.