What Happens if Your Parents Stop Paying on Your Student Loans?

A mother and daughter go over paperwork at a computer.
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Student loan debt is an ongoing problem in the U.S. — one-fifth of college graduates still owe on the funds they borrowed for their education. If you’re one of the graduates repaying student loans, shelling out the money each month can be a challenge, especially with all your other expenses.

But for some students, parents repay those loans. Whether the debt is actually your parents’ responsibility depends on the type of loan, though. Either way, when parents stop paying, it can put some stress on the former student. We have some tips to help you navigate the situation.

4 Types of Student Loans

If you receive a standard loan for your education, you’ll likely be the one responsible for repaying. Yes, your parents can choose to pay some or all of it for you, but the legal burden rests on you.

But some loans are issued to parents, and those loans will be their legal responsibility to repay. It’s important to understand the distinction.

Direct Subsidized Loans

When you use the Free Application for Federal Student Aid (FAFSA®) system to apply for financial aid, Direct Subsidized Loans are the goal. You’ll need to meet financial qualifications, and once you’re issued the loan, you’ll have to meet certain standards, but the government will cover the interest while you’re in school, during a six-month grace period after graduation and when you’re issued a deferment.

After you complete the FAFSA®, your chosen college will send a financial aid offer. This package will include any financial aid you’ve been granted, as well as the details of any subsidized loans you’ve been approved to receive. Information on unsubsidized loans will also be included in this package.

Our step-by-step guide makes filling out the FAFSA (mostly) painless.

Direct Unsubsidized Loans

Direct Unsubsidized Loans act as any other type of loan. You’ll accrue interest from the date the funds are issued, even while you’re in school. You can pay the interest as you go or allow it to accumulate, paying it once you’re out of school.

Some students opt to take out private student loans rather than rely on federal student aid. These are unsubsidized loans, as well, and whoever is named on the loan will be responsible for repaying it. In most cases, you’ll want to max out federal loans before looking at private loans, since federal loans typically have lower credit score requirements and better rates.

Direct PLUS Loans

While direct loans are issued to undergraduate students, a separate type of loan, called a Direct PLUS Loan, is issued to either graduate students or parents of undergrads. These loans typically come with a credit check and an origination fee, which will come out of the funds granted to the student.

There are two types of Direct PLUS Loans:

  • Grad PLUS Loans: This type of loan goes to graduate or professional students and can fund anything not covered by federal loans. A student can borrow any amount of funds under this type of loan, up to the full cost of attendance.
  • Parent PLUS Loans: Under this type of loan, parents of dependent students borrow money. Responsibility for paying this type of loan cannot be transferred to the student even after graduation.

In both cases, the person borrowing the funds will be responsible for repaying the loan. Although both types require payments begin immediately after graduation, borrowers can request a six-month deferment.

Direct Consolidation Loans

As with any loan type, student loans can be adjusted over time. You can refinance your student loan through a private lender, but you might get better rates and easier qualification through the federal government.

A Direct Consolidation Loan lets you combine multiple student loans into one to lower your monthly payment. Doing this may also help qualify you for certain loan forgiveness programs. Another benefit of going the governmental route is that there are no application fees. However, consolidating will extend the repayment period, and it could also wipe out any special benefits attached to the first loan, such as interest rate discounts.

Responsibility for Student Loan Repayment

When the bill for your college loans comes due, that bill will go to the person whose name is on the loan. For Parent PLUS Loans, that means your parents will owe the money. While there’s no rule stating you can’t help pay for your college, the loan is in their name and they hold the legal responsibility to pay.

For all other loan types, though, you, the student, hold the ultimate responsibility. As with Parent PLUS loans, you can have a little help paying them. Nothing is stopping your parents from dropping some money into your account to help with the expense. But if one day they stop helping, you’ll have to make that payment on your own.

Consequences of Missed Loan Payments

Whether you have a federal, private, Direct, or Direct PLUS loan, if your name is listed as responsible, failure to pay reliably has some consequences. Here are a few.

Late Fees

Check your loan documentation for specifics, but the first penalty you’ll face is a late payment fee. On federal loans, this can be as much as 6 percent of the monthly payment due. This fee will continue with each missed payment.

Most loans allow a little leeway in making your payments. Check the fine print to see how many days you have before a late fee is charged. Whether it’s a private or federal loan, you should be able to miss a few days before you’re penalized.

Credit Damage

Once your federal loan is 90 days late, the delinquency will likely be reported to the credit bureaus. This applies whether it’s a federal or private loan. For a Parent PLUS Loan, the negative mark will solely be on the parent’s credit report, even though the loan was for your benefit. For loans issued directly to you or private loans in both your names, your credit score will take a hit.

“A history of non-payment will not only impact the former student’s ability to borrow money in the future (for example, for a home or car), it can also hurt their ability to rent a home and may even harm employment prospects in some instances,” Accredited Financial Counselor and Chartered Retirement Planning Counselor Lisa Whitley said. “If a student finds themselves unexpectedly on the hook for a private student loan, it is imperative that they proactively work with the lender to arrange a workable payment plan.”

Loan Default

After 270 days, or nine months, your federal loan will go into default. The Consumer Financial Protection Bureau reports that private student loans default in as little as 90 days. At that point, your credit will take a serious hit, assuming your name is listed as a borrower.

Once a loan defaults, the total amount, including all interest, will be due. You’ll also be ineligible for deferment or payment plan changes. Wages may be garnished and your tax refund will likely be held and put toward the payment. The lender/loan holder may also take you to court to collect the funds.

If Parents Stop Paying

Whether it’s a Direct or Parent PLUS loan, the loss of a parent’s financial support can be devastating. The average federal student loan debt is $37,338, and that bumps up to $54,921 with private loans. Being suddenly saddled with that bill can put a serious dent in your budget.

Below are some steps to take if your parents stop paying on your loan.

1. Review the Loan Agreement

The first place to start if your parents have stopped paying is your student loan agreement. If it’s a private loan, you’ll need to track down the paperwork with the lender. However, chances are, it’s a federal loan. If so, log into your account at StudentAid.gov and find your loan on your dashboard.

Your loan documentation should provide payment terms and grace periods. “This will determine your options and the potential consequences of missed payments,” Doug Carey, Chartered Financial Analyst and president and owner of WealthTrace, said.

2. Discuss the Situation with Your Parents

Did your parents sit you down and discuss their circumstances? If not, take them aside and have a respectful conversation. Try to keep feelings out of it and work out a solution.

“There may be valid reasons, such as financial hardship, that you can work through together,” Carey said.

3. Contact the Loan Servicer

“If the loans are federal student loans, contact the loan servicer to discuss your options,” Carey said. “You may be eligible for deferment, forbearance, or income-driven repayment plans that can temporarily lower or postpone your payments based on your financial situation.”

Private lenders are also amenable to negotiations. If you can work something out that keeps payments coming, it benefits everyone involved.

4. Consider Refinancing

If your loan hasn’t been refinanced recently, look into options. Federal loans can be refinanced with private lenders, reducing your monthly payment and lowering your interest rate.

Before refinancing a federal student loan, though, be aware of the downside. You’ll lose benefits like deferment and forbearance, as well as access to any future student loan emergency relief.

Although parental help can make a big difference, there are a few steps you can take to reduce the burden of paying your student debt. By working with loan servicers and adjusting your budget, you may find you can tackle the payment without facing penalties or credit damage.

Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.