Student Loan Interest Restarts: What Happens If You Don't Pay?

For the first time in years, student loan borrowers on September 1 will see interest accruing on their debts as payments will resume one month later in October. Not paying those debts can lead to dire personal economic ramifications.

The multi-year moratorium instituted by former President Donald Trump in March 2020 in response to the COVID-19 pandemic was continued by President Joe Biden, providing a temporary financial reprieve for the approximate 44 million student loan borrowers who collectively owe about $1.6 trillion.

The Biden administration, which has strived to fulfill campaign promises associated with student loans, received bad news earlier this summer when the Supreme Court in a 6-3 decision ruled against his plan that would have granted borrowers earning less than $125,000 a year up to $10,000 in debt relief. It also would have made $20,000 available to Pell Grant recipients from low-income households.

Interest accrual arrives as inflation continues to hamper Americans, consistently prompting the Federal Reserve to raise interest rates across the board to minimize the economic effects. Jerome Powell, chairman of the Fed, recently said another rate hike will be deliberated next month to bring the current inflation rate of 3.2 percent down to its goal of 2 percent.

The impact of loan defaults

The Biden administration recently announced the income-driven repayment (IDR) plan called Saving on a Valuable Education (SAVE), which it says could impact over 20 million borrowers by reducing payments based on discretionary income. The Department of Education (DOE) will stop charging any monthly interest for borrowers who keep up with their required payments.

Separate from the plan, the Biden administration said earlier this summer that borrowers will receive a temporary 12-month "on-ramp" to restart payments in which the DOE won't report missed payments to credit bureaus that could potentially hamper personal credit scores.

The Internal Revenue Service (IRS) reminded employers and employees last week that employers who have educational assistance programs can use them to help pay student loan obligations for their employees.

For those who do default on loans, they could feel the impact in a variety of ways, including:

• Wage garnishment—paychecks could be held by employers to ensure debt payments are made.
• Tax Returns—Federal tax refunds could be seized by the IRS and applied towards unpaid loans.
• Benefits—The government could garnish 15 percent of Social Security benefits including retirement or disability, though it can't go after Supplemental Security Income that pays for basic necessities.

Loan borrowers 'need to do it now'

Federal student loans for undergraduates currently have an interest rate of 5.50 percent for the 2023-24 school year, according to personal finance website Bankrate. Graduate students have interest rates of 7.05 percent or 8.05 percent for unsubsidized loans or Direct PLUS loans, respectively.

About 92 percent of student loan debt is federal, with interest rates ranging between 4.99 and 7.54 percent. Private loan rates are more volatile, ranging from 4 percent to a whopping 15 percent.

What Happens If I Don't Pay My Student Loans?

While some polls have expressed college graduates' frustration with exorbitant debt amounts and accrued interest—with some even vowing to boycott payments altogether—student loan experts tell Newsweek that ignoring and not fulfilling the payments they signed onto will lead to potentially calamitous outcomes.

Jack Wallace, director of governmental and lender relations at Yrefy, told Newsweek via phone that the one-year on-ramp will help student loan borrowers from being delinquent and defaulting in a 12-month period and negatively impacting their credit.

However, neglecting payment or even pondering filing for bankruptcy on such loans is not advised.

"I think eventually people are gonna want to buy a car or a house or get credit cards if they don't have them now, and that's going to negatively impact their credit once they get outside of that leniency period," Wallace said.

A recent poll conducted by financial services company Empower found that about one-third of borrowers expect their payments to increase by up to $1,000 as they resume, with the same amount also pondering whether to use credit cards to make payments.

Wallace offered three 'P' tips for borrowers: proactiveness, patience and preparedness. That includes exhausting all options in terms of IDR plans and what they qualify for, and signing on to new plans like SAVE if applicable.

"I've been talking to people all over the country since about the 15th of June...and people are pissed off that people keep talking about forgiveness and 6 or 8 million people got letters saying they will get [debt] forgiven, and they're not," he added. "So, you know, you really gotta go with what's out there. And people need to do it now, do it today."

Nathan Daun-Barnett, associate professor of higher education administration at the University of Buffalo, told Newsweek via email that the SAVE plan is a "game changer" but it won't prevent some early defaults when repayment goes into effect due to the time between its enaction and payments resuming.

"SAVE is really an extension of the income-contingent loan repayment program—which I thought was actually the more important part of the earlier Biden-Harris plan for loan forgiveness—and if successful, perhaps it will be the vehicle for consolidating the existing federal income-contingent loan repayment programs," he said. "That could reduce what borrowers need to pay and the key will be getting people to sign up for the program."

More borrowers will also have less discretionary income to spend on products, services and activities, he added. The Empower poll found that 59 percent of respondents plan to reduce spending in those areas.

"The group that gets left out are those that borrow from the private markets to finance college, but I am not sure there is a way to consolidate those into the IDR program," Daun-Barnett said. "Some will borrow specifically for college expenses, but others will tap into home equity and things like that."

The average cost of college, which includes books, supplies and living expenses, is about $36,436 per student per year, according to the Education Data Initiative. It represents a doubling of costs this century compared with the last, representing a 2 percent annual growth rate in the past decade alone.

Newsweek reached out to the DOE and White House via email for comment.