What Happens If You Don’t Pay Student Loans During the Coronavirus?

There’s almost no aspect of life that hasn’t been impacted by COVID-19. When the viral outbreak surging worldwide, companies have been scrambling to find the best ways to support social distancing while keeping their business running.

Many people, however, are finding themselves without work and unable to repay debts, like student loans. What happens if you don’t pay student loans during the coronavirus lockdown?

Thankfully, the $2.2. Trillion Stimulus Bill passed March 25th to provide COVID-19 economic relief will automatically pause federal loan payments for a six-month period ending September 30, 2020.

After that, consequences of missed payments are likely to resume. Plus, there’s the complexity of private student loans, which have different terms and conditions.

Here is a guide to repaying your debt during (and after) the pandemic.

What Happens If You Don’t Pay Student Loans?

Student loan debt is a form of unsecured debt that lenders offer in exchange for your promise to pay.

Unlike a home or auto loan, lenders don’t have a tangible item they can collect to cover your debt in the event you don’t have the money to make payments.

For this reason, not paying your student loan debt usually has far-reaching consequences. Once your payment is late, it is considered delinquent.

Once it goes past 270 days, you’re at risk of default. The exact number of days varies based on your loan servicer, but this is a standard time frame for most federal loans.

Defaulting on your student loans is a serious offense that can result in acceleration, or the entire balance being due at once. The loan provider can opt to take money out of your paycheck, or garnish your wages, to repay the debt.

You don’t be able to qualify for any form of student loan products in the future and could potentially be taken to court. If you’re looking to buy a house in the near future, the default on your credit report could pose a major red flag to potential lenders.

But in the coronavirus pandemic, there are new options to consider if you don’t pay your student loans. With the new Coronavirus Stimulus Bill, your time to delinquency and default has been extended.

Coronavirus Stimulus Bill

The coronavirus pandemic has temporarily changed the way the federal government handles student loans. Many Americans have lost work or have reduced hours that affect their ability to meet their loan obligations.

Government mandates of social distancing are causing businesses from movie theaters to restaurants to shut their doors to prevent the spread of coronavirus.

To support the millions of Americans taking a financial hit, congress passed a $2.2 trillion stimulus package that includes student loan support.

The bipartisan bill passed on March 25, 2020, which now allows student loan borrowers to pause their federal loan payments with no penalty. Borrowers have relief for six months at zero percent interest under the stimulus bill.

Previously, the Department of Education had offered a 60-day forbearance for anyone suffering reduced work hours or unemployment due to the viral outbreak. Borrowers needed to contact their loan servicer to get the forbearance process started.

Under the new bill, all borrowers automatically have suspended payments for 6 months through September 30, 2020.

Even if your payments are set up on auto-draft, they won’t draw during this period.

This means you don’t need to do anything to qualify for deferred payments, such as proving financial hardship.

What About Loan Forgiveness?

If you are seeking Public Service Loan Forgiveness, pausing your student loan payments for six months won’t count against you.

You can still have your loans forgiven after ten years as long as you follow the program guidelines.

What If I’m in Default?

If you’re already in default, collection on your loan will also pause during the 6 month period set aside by the stimulus bill.

The goal is to help Americans continue making payments on other essential bills like utilities and food while they recover from financial setbacks.

This means that any wages garnished because of a default judgment will stop for 6 months. Keep in mind that these rules apply to federal loans only.

Private lenders have the option to continue pursuing payment on loans in default.

You will still need to contact your loan servicer to discuss options for getting out of default once the process begins.

Private lenders are rolling out separate relief efforts to help borrowers in financial distress. If you are unable to make any payment arrangements at all, contact your lender immediately to discuss solutions.

To Pay or Not to Pay?

Interest won’t accrue on your federal loans during the forbearance period set forth by the Coronavirus Stimulus Bill. That might seem like great news, but if you can pay toward your loan during this period, you’ll have an usually advantage.

Typically, a part of your loan payment goes toward the interest payment. During this 6 month period, all of your payment will go toward the principal balance.

The principal balance of your loan is the original amount you borrowed. Lenders profit on the amount of interest they charge on your loan. The longer it takes you to repay the debt, the more the lender earns on your loan.

Therefor, paying your loans during this period of deferment shortens the length of time it will take to repay your loan in full.

Carefully consider how much you can afford to pay each month to cover your debt and pay what you can. It might not be the full payment, but it’s better than not taking advantage of interest-free payments.

Suspending Loan Debt

Having loan debt suspended can feel like getting a free pass to not pay your bills. But what happens if you don’t pay student loans when you have the money?

You could take longer to get out of debt delaying your overall financial goals. When you repay debt quickly, you free up your money for long-term financial goals, like creating an emergency fund, saving up for a home, or preparing for retirement (no matter how young you are).

Weigh the pros and cons of pausing your loan debts during this time of crisis.

For some people, financial relief will be the best choice. For others, this interest free period may let you whack away at paying down your loans faster and more aggressively than ever.

Up Next: Paying off Student Loans Quickly: 9 Tips You Need to Know

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