Students loans are beneficial to millions of students across the globe. Most needy students are grateful for this option since it enables them to complete their studies. Governments often organize student loans in many countries, and they usually have very reasonable interest rates.
Upon successful completion of studies, beneficiaries are expected to start repaying the loans so that other students will be funded and the cycle continues.
Defaulting on repayment of the loan has effects that are like those of defaulting on paying credit card debts. So, let’s see what will happen if one fails to repay student loans.
90 Days Overdue
Nothing will happen to you until you are 90 days overdue. However, the lenders will report your name to the credit bureaus. We all know what it means to be reported to the credit bureaus; the credit score will definitely go down.
When the score is lowered, many things can happen as we will outline below. Therefore, people cannot afford to damage their credit history because of this simple mistake.
Defaulting Stage
If the habit of not paying your student loans continues, you will reach the defaulting stage after 270 days. The best protocol to be followed by the lending companies is to use a debt collection agency, who will do everything possible to make sure that you repay.
After being listed with the credit bureaus and entering a defaulting stage, a couple of things could happen.
- Your credit score will be lowered.
- Your application for future credit cards may be denied.
- Obtaining loans and other financial help will become difficult.
- Legal action will be taken against you by the debt collection agency.
Can the Government and Banks Sue?
Every lender is experiencing a challenge because the rate of lending to current students is higher than the rate at which students who have graduated are repaying. The amount owed to the government and banks keeps piling up by the year as more students find it difficult to repay.
As a result of this, the government has tried to develop different measures to ensure that all students repay their loans. As mentioned above, the process is lenient since it takes several months before they can say that you have defaulted.
One of the measures the government has adopted is to collaborate with employers to deduct and remit student loan payments depending on the amount of income.
However, there are hundreds of thousands of students who are not formally employed. Some are entrepreneurs, while others are jobless.
So, the big question is whether the government and banks can legally sue those who have defaulted or not. Legally, the contract signed by students before receiving student loans indicates the terms and conditions of repaying the loans.
So, the government and the banks can sue a person who has defaulted on repayment. Several cases have been opened in a court of law especially if the government and the banks can confirm that you are in a position to repay.
The court can issue a court order instructing you to start repaying the loans immediately. This effort together with lowering a person’s credit score have enabled the government and the banks to recover a lot of money from people who have student loan debt.
What You Need to Do
If it comes to this point, it is better to seek help from experienced financial advisors. The first thing the experts will do is to look into the factors that are leading to defaulting. It could be a financial crisis in your life. Then, there is nothing much you can do about it.
What the experts will do is to negotiate with your lenders to develop a better payment plan that is affordable to you. In most cases, the lenders are flexible because their interest is to collect as much money as possible.
Together with your financial advisor, they will come to a consensus on the best terms to repay the loan that is reasonable and affordable to you. From here on, you will now be required to repay without fail unless there are unavoidable circumstances.
On the other hand, a person can start a better personal finance management plan to ensure that student loans are included in the budget. If there is a need, you can negotiate for lower repayment rates with the lenders. Better still, you can take out another loan with more reasonable repayment terms to offset this one.
There are a couple of options here although personal loans are the best. You probably do not need collateral to secure one especially for those with a stable source of income. One may wonder why you need a personal loan, which has a higher interest than a student loan.
But the main reason could be if other conditions like the monthly payments are more affordable than those of a student loan. Therefore, it is essential that you weigh all the pros and cons of going in this direction.
Lastly, a person can liquidate an asset to clear the student loan if the individual is struggling to repay. If you or your family has a house, land, equipment or even a car that can be sold to obtain money to pay off the loan, then this will relieve the burden of making monthly installment payments.
Many companies can assist you in selling a property or even buy it at the right price. Some real estate companies do buy old homes and other properties no matter what condition they are in. Also, it is possible to sell any other asset online through various platforms.
Conclusion
Many people do not take the issue of student loan repayment seriously enough. However, it is a serious matter that requires careful consideration. As mentioned above, the main adverse effect of not repaying student loans is damaging the credit score. The best thing is that there is a lot you can do to rebuild your credit score. Plan your finances carefully to avoid defaulting in the first place.
Brian is a Dad, husband, and an IT professional by trade. A Personal Finance Blogger since 2013. Who, with his family, has successfully paid off over $100K worth of consumer debt. Now that Brian is debt-free, his mission is to help his three children prepare for their financial lives and educate others to achieved financial success. Brian is involved in his local community. As a Financial Committee Chair with the Board of Education of his local school district, he has helped successfully launch a K-12 financial literacy program in a six thousand student district.