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What happens when borrowers fail to pay student loans?

On Behalf of | Aug 31, 2023 | collections

Companies that offer student loans, some of which are federally backed and some which are not, may run into issues where these loans are not actively repaid. Many borrowers had the full intention of paying them when they took the loans out, but they may have stopped doing so for a variety of reasons.

This can be problematic from a collection standpoint because there is no physical asset tied to a student loan. By contrast, if a homeowner stops paying their mortgage, the lender can foreclose on the home and then resell it. This can be a hassle, and some money may be lost, but the lender knows that they always have a physical asset to back up the investment they’ve made in the borrower’s decisions.

With a college education, a person who has stopped paying can never return their diploma. But there certainly are ramifications if people don’t pay back these loans. What are some examples?

Fines and fees

Most student loans have interest rates attached to them, and lending contracts may specify that fees for late payments will be levied if an account becomes delinquent. Someone who begins to miss payments is going to be increasing the total that they owe over time.

The impact on a borrower’s credit score

Next, not paying a student loan can have a major impact on a person’s credit score and their credit history. After 90 days, a loan is formally classified as delinquent. This generally means that a person has to miss three payments before reaching that point. If the non-payment continues for 270 days, many lenders will consider sending it to a collections agency. By this point, the damage to someone’s credit score could already be substantial. They would theoretically have been missing payments for months after their account had become delinquent.

Collecting what is owed

It’s clear that nonpayment can cause problems for a borrower, but it still happens. Lenders who have provided these loans and who are looking to capitalize on the investment they’ve made need to know about all the legal options at their disposal to collect the unpaid money and any additional fines and fees.