What happens to student-loan borrowers who miss payments starting next month

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  • Federal student-loan payments are starting up again beginning next week.

  • There are a few options for borrowers who can't, or won't, make those payments.

  • Still, there are consequences to falling behind on payments that could begin next year.

Millions of student-loan borrowers are about to face another monthly bill — and they might not be able to afford it.

On October 1, borrowers are set to begin receiving bills for their federal student-loan payments. The pandemic payment pause officially ended on September 1 when interest began accruing again on borrowers' balances, and bills are set to start becoming due in October after over three years of relief.

The bill to raise the debt ceiling that President Joe Biden signed at the end of June codified the end of the student-loan payment pause, meaning Biden cannot issue a further extension in connection to COVID-19. While it preserves the right for a president to implement a pause in the event of a different national emergency, pandemic relief for federal borrowers is nearing an end — and their balances have started to grow once again.

There are, however, some options for borrowers who find they cannot afford to make those payments or decide they just don't want to. Here's what borrowers should be aware of, along with the potential consequences of missing a payment starting next month.

On-ramp period

The Education Department announced some temporary relief for borrowers if they find they cannot afford payments next month. It's set to implement a 12-month "on-ramp" period beginning in October, during which the department will not report any missed payments to credit agencies.

But there are a couple of catches: Interest is still expected to accrue during this period, so once the on-ramp is over, borrowers who did not make any payments during the next year might find their balance is larger due to the interest that builds onto the borrower's principal every day. Also, the department's guidance says while it will not actively report missed payments, it does not have control over credit-scoring agencies.

"We don't control how credit scoring companies factor in missed or delayed payments," the guidance said.

After the on-ramp

Once the on-ramp period is over, normal practices surrounding student-debt delinquency and default are set to ensue. The first day a borrower misses a payment, their loan becomes delinquent, and it will remain in delinquency until the borrower repays the past-due amount or enters deferment or forbearance. If a borrower is delinquent for more than 90 days, the borrower's loan servicer will report the late payments to a national credit bureau, where it can go into default.

The point at which a loan defaults depends on the type of loan a borrower has — loans within the federal direct program or Federal Family Education Loan program will enter default if a borrower fails to make a payment for at least 270 days. Loans within the Perkins Loan Program can be declared in default if a payment isn't made by the scheduled due date.

The consequences of a default can be severe. Borrowers in default are no longer able to receive deferment or forbearance, their credit ratings will be damaged, wages could be garnished, and federal benefits such as Social Security could be withheld.

Boycotting payments

An August survey from Intelligent, a higher-education-research platform, found that out of 1,000 federal borrowers, 62% of them said they were likely to boycott payments, and half of the sampled borrowers believed a boycott could lead to total loan forgiveness.

The future of broad debt relief, however, is unclear — after the Supreme Court struck down Biden's first plan for relief, the Education Department announced it is trying again using the Higher Education Act. Still, that route will take time due to the negotiated rulemaking process, which requires a series of negotiations and public comment, and the department has previously recommended that borrowers who are able to make payments do so to avoid the consequences of a missed payment down the road.

Read the original article on Business Insider