You Don’t Have to Pay Your Student Loans If You Don’t Want To

dana sitar c e p f ® Jun 18, 2021
Woman holding books on a college campus

Student loan debt defines the millennial financial condition.

In the U.S., 45 million borrowers collectively owe nearly $1.6 trillion in student loan debt.

About two-thirds of graduates with a bachelor’s degree took on student loans to get through school, according to a 2019 report from the National Center for Education Statistics. Graduates leave with an average of around $30,000 in debt. The average monthly payment is $393, Forbes reports.

So much financial advice for millennials is really about this one thing: how to manage and eliminate the student loan burden.

I’ve written a lot of this advice in five years covering personal finance. It’s been good and useful. But like most experts in this space, I’ve neglected an important reality.

Many of us are unconcerned with the totality of this debt — what it means for our financial goals or creditworthiness for the next 10 or 20 years. We’re concerned with how a $400 monthly bill effects us right now.

Here’s the advice I’ve always wanted to share: You don’t have to pay your student loans if you don’t want to.

Why people say you should pay your student loans

Smart people argue for repaying student loans (and any debt) as quickly as possible to reduce how much you pay in interest — and also simply to not have debt.

A lot of people hate debt. I come from a pragmatic Midwestern family of the 90s, and, my goodness, you can hardly do worse than accruing debt in that environment.

That’s because having — and especially not paying — debt effects your credit score, which affects that cornerstone of the American Dream: home ownership. Bad credit keeps you from getting a mortgage. At best, it means anything you finance will cost more than it would with good credit, and that’s just plain impractical.

Plus it’s rude to not pay what you owe. Unpaid debt messes up our whole system. See: 2008 housing crisis.

Reasons to not pay your student loans

Getting out of debt sounds nice — freedom and not crumbling the economy and all that. But not making that monthly payment sounds pretty nice, too.

The main reason you probably don’t want to repay your student loans is to keep that extra money in your monthly budget. You can do a lot with a few hundred bucks.

Achieve financial goals

Lots of financial experts point out smarter ways to use your money than paying off student loans as quickly as possible. You could:

  • Invest: If you have money to spare in your budget and investing could help you earn 7% on it, paying down your student loans to avoid paying 6% isn’t financially sound. There’s a lot of math to do there, so just trust me.
  • Pay off higher-interest debt: Same math-y stuff here. Credit cards, auto loans or personal loans probably charge more in interest than your student loans, so it’s smartest to pay those off first.
  • Contribute to retirement: This falls under investing, too, because your money could make money. The argument is even stronger if an employer match could double your money before it’s invested.

Improve your standard of living

A lesser-made argument: You could enjoy life more by spending that money. 

Not making your student loan payment means more money in your pocket now — who’s worried about future debt? You could die tomorrow, and you might skip a latte today because some blogger told you to?

Not making a student loan payment could mean more money in your budget each month for things like:

  • Higher rent: Yeah, you can do your job from a computer at home, but for some reason every company you want to work for expects you to live in downtown Madison (and work for Waupaca wages).
  • Better groceries: What’s a few thousand dollars in interest and fees when pesticides could give you cancer you can’t possible afford to treat in 20 years?
  • Gym membership: Staving off depression and anxiety takes a lot of work in these knowledge-economy days. A little exercise now could save you tons later in therapy, medication and lost wages (you know, those days when you just cannot).
  • Nicer stuff: I’ve lived with a $12,000 annual income, and I’ve lived with a $70,000 income. I can attest to the psychological benefit of sometimes buying new clothes, the latest iPhone and a couch that doesn’t smell weird.

4 legitimate ways to not pay your student loans

The Department of Education appears to realize the ill-fated risk it assumes by doling out tens of thousands of dollars in debt to teenagers. To avoid letting debt destroy our lives before they even begin, it’s created tons of options to help you get out of paying.

Private lenders offer a few relief options, too, but that debt is way stickier. If you plan to not repay your student loans, I recommend indebting yourself only to the government.

Here are some ways to eliminate or reduce the monthly cost of student loans.

Deferment & forbearance

Deferment and forbearance are types of temporary relief from your student loan payments. You have to apply and prove financial hardship to qualify. You’ll suspend monthly payments for a period in either case.

For federal loans, the distinction is:

  • Deferment: Interest won’t accrue on subsidized loans or Perkins loans. It’ll continue to accrue on other loans. Your loans are automatically deferred while you’re in school and for a six-month grace period after you leave.
  • Forbearance: Interest will continue to accrue on all your loans.

Most private lenders also offer that in-school and just-after-school deferment period, but your loans will accrue interest. Many also let you apply for forbearance later on, and some cool lenders have alternatives like skipping payments once a year.

Your student loan servicer can tell you more about any of these options. For federal loans, find your servicer through the National Student Loan Data System (NSLDS). For private loans, your original lender should be your servicer.

Income-driven repayment

When you accept federal student loans, you initially agree to the standard repayment plan, which spreads monthly payments evenly over a 10-year (120-payment) period. It doesn’t consider your ability to afford payments.

You can apply for income-driven repayment if you can’t or don’t want to pay the standard amount each month. These plans limit your monthly payment based on your discretionary income.

  • Pay As You Earn (PAYE): Pay 10% of your discretionary income for 20 years.
  • Income-Based Repayment (IBR): Pay 10% or 15% for 20 or 25 years, respectively, depending on when you took out the loan. 
  • Revised Pay As You Earn (REPAYE): Pay 10% for 20 years for undergraduate loans and 25 years for graduate loans. 
  • Income-Contingent Repayment (ICR): Pay no more than 20% for 25 years. Only parent PLUS loans are eligible, and this is the only plan parent PLUS loans are eligible for.

Under IDR, your monthly payment could be as low as $0 — I’ve been there. That means you’ll technically stay current on payments without shelling over anything.

After the repayment term, your remaining balance is forgiven. So, fingers crossed that you never get a raise and avoid those student loans forever!

To qualify for PAYE or IBR plans, the monthly payment calculated has to be lower than your standard payment (because, duh. It wouldn’t help you if you had to pay more.). REPAYE and ICR plans don’t have that requirement; you just have to have eligible loans.

Student loan forgiveness & cancellation

The crème de la crème of not paying your student loans is to get the lender to tell you you don’t owe the money anymore. It usually takes a while, and qualification is particular, but here are your options for federal student loan forgiveness:

  • Public Service Loan Forgiveness: This is the belle of the forgiveness ball, the one we can’t take our eyes off of (we shouldn’t objectify beautiful things this way). Work in government or nonprofits, and you could qualify to have your balance forgiven in about 10 years under this not-as-simple-as-it-sounds ED program. Teacher Loan Forgiveness is similar but quicker and even harder to qualify for.
  • Cancellation and discharge: The government will forgive your loan balance for a bunch of other reasons, too, but it can be persnickety. If you’re disabled or die, or your school closes, you (or your heirs, who, yeah, inherit your debt) can look into this option.
  • Forgiveness under IDR: After your IDR repayment term, your remaining loan balance is forgiven.

Bankruptcy for student loan debt

TL;DR: You’re not likely to be able to discharge student loans in bankruptcy. But it happens sometimes.

You could discharge federal and private student loan debt in bankruptcy if you can prove the payments present an “undue hardship.” Small detail, though: The law doesn’t define “undue hardship,” so the courts get to decide.

Most bankruptcy courts in the country determine your eligibility through the “Brunner” test, where you have to prove, as Forbes explains:

  • Your circumstances are such that you can’t repay the loan and maintain a minimum standard of living.
  • These circumstances aren’t ending anytime soon.
  • You’ve made good faith efforts to repay the loan (even if you haven’t actually been able to make payments), such as inquiring about alternative payment plans.

More fun legal stuff: In the 1st Circuit (Maine, New Hampshire, Massachusetts and Rhode Island), courts haven’t set a standard for this definition. In the 8th Circuit (North and South Dakota, Nebraska, Minnesota, Iowa, Missouri and Arkansas), the test is similar to but slightly different from “Brunner.”

Wherever you live, a bankruptcy lawyer can help you sort through this stuff.

Bankruptcy could be a useful last resort to get private student loan payments off your back without fielding years of calls from debt collectors. 

For federal loans, any circumstance that would qualify you for bankruptcy would easily qualify you for low or $0 payments under IDR, or for forbearance, which are way easier, don’t involve any lawyers or courts, and won’t destroy your credit.

What happens if you don’t pay student loans?

Nothing is easy. You signed that darn promissory note after reading it about as closely as the latest updates to Apple’s terms of service, and you’re legally obligated to repay what felt like free money at the time. Ah, the blissful ignorance of youth.

If you opt for an official path to non-payment (i.e. your lender or servicer is onboard), you’re looking at:

  • Accrued compounding interest: As long as you hold a balance on a loan, it’ll accrue interest (with few exceptions). Suspending or reducing payments through deferment, forbearance or income-driven repayment extends the time the loan sits unpaid, accruing interest that balloons what you owe way beyond what you originally borrowed.
  • Total outstanding debt: That big chunk of debt shows up on your credit report and could hurt your score. Many models don’t take student loan debt quite as seriously as other types, but a debt like $30,000 could make a mortgage lender think twice about handing you another heaping pile of long-term debt.
  • Federal tax on forgiven debt: The IRS taxes a balance discharged like income for that year, so plan ahead to avoid a surprise bill. (Some people want to change this law, so it might be different by the time you deal with it.) 

If you totally ignore the debt and skip payments of your own accord, you could face all of the above, plus:

  • Late fees: Each missed monthly payment could result in a fee, which will be tacked on to your balance.
  • Delinquency and default: When you miss a payment, your loan becomes “delinquent” until you catch up. A delinquent loan can go into “default” if it remains unpaid for a period defined by the lender. That period is 270 days for most federal loans, but could be as soon as immediately. The entire balance of a defaulted loan becomes due at once.
  • Wage garnishment: The government can snatch your government benefits and tax refunds, as well as up to 15% of your paycheck, to collect on defaulted federal loans.
  • Collections and lawsuits: Private lenders can hand your loan over to a debt collection agency, which may take you to court to collect on the loan. It could win the right to garnish your wages this way.
  • Effect on credit score: Lenders and servicers can report your loan delinquency or default to credit bureaus, which could be a serious knock on your credit score.

What are your priorities?

You’ve got a lot to consider to determine whether you’ll budget around that $400ish monthly payment or figure out how to avoid it.

I — you might guess — do what I can to avoid mine, mostly through IDR (though I spent many years before my personal-finance-writer days going the ignore-and-pray route).

I’ll likely have student loan debt basically forever, save for that pipe dream of a progressive government cancelling all of it for us.

But I will not at any point miss out on traveling, stick with a high-paying job I hate, or opt for PC instead of Mac to accommodate student loan debt.

You might prioritize eliminating debt and avoiding interest. You might value a perfect credit score for the power to finance your future home, business, child’s education or boat. You might not want to prove your income to Navient every year. You might feel duty-bound to return the favor the government paid your younger self.

Or maybe your biggest priority is to not have roommates when you’re 45.

What matters is that you know you have options.

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