What Happens If You Can’t Pay Student Loans?

Not paying student loans can lead to financial difficulties, affecting credit, wages, and eligibility for future financial assistance. This article explains what happens when student loans are not paid, outlining the distinctions between delinquency and default, exploring options to prevent these situations, detailing the repercussions of default, and providing pathways for resolving defaulted loans.

Understanding Delinquency and Default

Delinquency begins the day after a borrower misses a scheduled student loan payment. The loan account remains delinquent until the overdue amount is paid or other arrangements, such as a new repayment plan, deferment, or forbearance, are made. If a federal student loan payment is 90 days or more overdue, the loan servicer reports this delinquency to national credit bureaus, negatively impacting the borrower’s credit rating.

Default occurs when a borrower fails to make payments for a specified period, as defined in the loan’s agreement. For most federal student loans, including Direct Loans and Federal Family Education Loan (FFEL) Program loans, default occurs after 270 days of non-payment, roughly nine months. Federal Perkins Loans may be declared in default sooner, potentially after just one missed payment, depending on the loan holder. Private student loans have a shorter default timeline, ranging from 120 to 180 days of missed payments, or sometimes after three missed monthly payments. Once a loan enters default, the entire unpaid balance, including any accrued interest, can become immediately due, a process known as acceleration.

Exploring Options to Avoid Default

These options vary depending on whether the loan is federal or private.

For federal student loans, Income-Driven Repayment (IDR) plans calculate monthly payments based on a borrower’s income and family size, rather than the loan balance. These plans include Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). To apply for an IDR plan, borrowers provide documentation of their income, such as recent tax returns or pay stubs. Applications can be submitted online through the Federal Student Aid website, StudentAid.gov.

Deferment and forbearance are additional federal loan options that allow for a temporary pause or reduction in payments. Deferment permits payments to be suspended for specific qualifying events, such as enrollment in school at least half-time, unemployment, economic hardship, or military service. During deferment, interest does not accrue on subsidized federal loans and Perkins Loans, but it does on unsubsidized loans, Direct PLUS Loans, and FFEL PLUS Loans. Forbearance also allows for a temporary suspension of payments, but interest accrues on all loan types during this period. Borrowers can request forbearance for reasons like financial difficulties, medical expenses, or changes in employment. Both deferment and forbearance require submitting a request and supporting documentation to the loan servicer.

For private student loans, the options to avoid default are less standardized and depend on the individual lender. Private lenders are not required to offer specific relief programs. Borrowers facing difficulty should contact their private loan servicer directly to inquire about available hardship programs, modified payment plans, or temporary payment relief options. Some lenders offer their own forms of forbearance or temporary payment adjustments. It is important to discuss these possibilities as soon as repayment challenges arise, as solutions vary by lender and loan agreement.

Consequences of Loan Default

Once a student loan enters default, the repercussions impact a borrower’s financial standing and future opportunities.

For federal student loans, defaulting leads to involuntary collection actions and loss of benefits. A defaulted loan is reported to national credit bureaus, resulting in negative impacts on a borrower’s credit score, making it difficult to obtain future credit, housing, or employment. The federal government can initiate wage garnishment, where a portion of the borrower’s earnings, up to 15%, is withheld directly from their paycheck without a court order and sent to the loan holder to repay the debt. Federal and state tax refunds can be withheld and applied toward the defaulted loan balance through the Treasury Offset Program. For older borrowers, a portion of Social Security benefits, up to 15%, can also be offset to repay the defaulted loan.

Federal loan default results in the loss of eligibility for benefits. Borrowers lose access to future federal student aid, including grants and additional loans, and are no longer eligible for deferment, forbearance, or income-driven repayment plans. Collection costs are added to the outstanding loan balance, increasing the total amount owed.

For private student loans, the consequences of default include negative credit reporting, damaging the borrower’s credit score. Unlike federal loans, private lenders must obtain a court judgment to pursue involuntary collection methods. Once a judgment is secured, private lenders can pursue wage garnishment or bank account levies to recover the debt. Lenders may also sell the defaulted loan to a collection agency, which can pursue repayment and add collection fees to the balance.

Resolving a Defaulted Loan

Getting a federal student loan out of default is possible through specific programs. Two options are loan rehabilitation and loan consolidation.

Loan rehabilitation involves making a series of voluntary, reasonable, and affordable monthly payments. For most federal loans, this means making nine on-time payments within a 10-month period. The payment amount is determined by the loan holder based on a percentage of the borrower’s discretionary income. Upon successful completion of rehabilitation, the loan is removed from default status, and the record of default is removed from the borrower’s credit history, though late payments prior to default may remain. This option can be used only once per loan.

Alternatively, federal student loan consolidation can be used to get out of default. This involves combining one or more defaulted federal loans into a new Direct Consolidation Loan. To qualify, borrowers must either agree to repay the new consolidation loan under an income-driven repayment plan or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidation. While consolidation removes the loan from default and stops collection activities like wage garnishment and tax offsets, it does not remove the record of the default from the borrower’s credit history, unlike rehabilitation. The new consolidation loan will have a new interest rate, which is the weighted average of the interest rates of the loans being consolidated.

For private student loans, resolution involves direct negotiation with the lender or the collection agency. There are no standardized federal programs like rehabilitation or consolidation for private loans. Borrowers can negotiate a settlement for a reduced amount, establish a new payment plan, or explore temporary hardship options such as forbearance. These are at the lender’s discretion and terms vary. Communicate directly with the lender to understand available resolutions.