What Happens If You Can’t Pay Your Student Loans?

Student loan debt can be challenging to manage, especially during unforeseen circumstances. Understanding the repercussions of missed payments and available options is important. This article clarifies the sequence of events from missed payments to default, and outlines strategies for addressing these challenges.

Initial Impact of Missed Payments

A student loan becomes delinquent the moment a payment is missed. Loan servicers typically apply late fees or other penalties shortly after a payment is missed, which can increase the total amount owed.

As delinquency continues, the impact on a borrower’s credit score becomes more pronounced. Federal loan servicers generally report missed payments to the national credit bureaus once they are 90 days past due. Private loan lenders may report delinquencies even sooner, sometimes after just 30 days. This negative reporting can significantly damage creditworthiness, making it harder to obtain future credit, housing, or even certain employment opportunities.

Borrowers will receive increasing communication from their loan servicer, reminding them of overdue payments and offering information on how to bring the account current. Ignoring these notices can lead to more severe consequences, as delinquency is a precursor to loan default.

Defining Default and Its Consequences

Student loan default occurs when a borrower fails to repay their loan according to the terms outlined in the promissory note. For most federal student loans, this happens after 270 days of continuous non-payment. Private student loans can default more quickly, with terms varying by lender, often after 90 to 180 days of missed payments.

Once a federal student loan enters default, the entire unpaid balance and any accrued interest can become immediately due, a process known as acceleration. This status also leads to the loss of eligibility for various federal student aid programs, including grants and additional loans, making it difficult to return to school. Furthermore, borrowers in default become ineligible for federal loan benefits and repayment options like deferment, forbearance, or income-driven repayment plans.

The federal government possesses significant collection powers for defaulted federal loans. It can garnish wages, withholding up to 15% of a borrower’s disposable pay without a court order. However, borrowers are generally protected to retain an amount equivalent to 30 times the federal minimum wage per week. The government can also intercept federal and state income tax refunds, applying them towards the defaulted loan balance.

Social Security benefits can also be offset, with up to 15% of payments withheld to repay defaulted federal student loans. Collection agencies may pursue the debt, and borrowers can be charged additional collection costs, which may be as much as 25% of the loan’s balance. Unlike most other debts, federal student loans have no statute of limitations, meaning the government can pursue collection indefinitely.

For private student loans, the consequences of default are equally serious, though the collection process differs. Private lenders typically must obtain a court judgment to garnish wages or levy bank accounts. Once a judgment is secured, a private lender may garnish up to 25% of disposable income. Defaulting on private loans also severely damages a borrower’s credit score, which remains on credit reports for up to seven years.

Strategies for Repayment Challenges

Borrowers facing difficulty with student loan payments have several options to consider, particularly for federal loans, to prevent default or to recover from it. These strategies aim to make payments more manageable or to temporarily pause them.

For federal student loans, Income-Driven Repayment (IDR) plans can adjust monthly payments based on a borrower’s income and family size. Plans like PAYE, REPAYE, IBR, and ICR can result in payments as low as $0 per month for some individuals. Enrolling in an IDR plan can prevent delinquency and default by aligning payments with financial capacity.

Deferment provides a temporary pause in loan payments for specific situations, such as active military service, enrollment in school at least half-time, unemployment, or economic hardship. During deferment, interest does not accrue on subsidized federal loans, though it generally does on unsubsidized loans. Deferments are typically granted for up to three years.

Forbearance also allows for a temporary cessation or reduction of payments, usually for reasons like financial difficulties, medical expenses, or changes in employment. Unlike deferment, interest typically accrues on all loan types during forbearance, increasing the total amount owed over time. General forbearance is usually granted for up to 12 months at a time, with a cumulative limit of three years.

Federal loan consolidation through a Direct Consolidation Loan combines multiple federal loans into a single new loan. This can simplify repayment, potentially lower the monthly payment, and provide access to additional income-driven repayment plans. Consolidation can also be a pathway to getting out of default, restoring eligibility for federal aid and repayment options.

For federal loans already in default, loan rehabilitation is a program designed to bring the loan back into good standing. This involves making nine voluntary, reasonable, and affordable monthly payments over a period of 10 consecutive months. Successfully completing rehabilitation removes the default status from a borrower’s credit report and restores eligibility for federal student aid and benefits.

In limited circumstances, federal student loans may be discharged due to events such as death, total and permanent disability, school closure, or borrower defense to repayment. These discharge options provide relief from repayment obligations under specific qualifying conditions.

Private student loan options are generally more restricted than federal programs. Borrowers with private loans should contact their lender directly to inquire about potential temporary hardship programs, payment modifications, or refinancing options if their credit history allows. Some private lenders may offer their own versions of deferment or forbearance, but terms vary significantly.

Bankruptcy is an option for student loan discharge, but it is rarely granted and requires proving “undue hardship,” a difficult standard to meet. This process involves a separate court action within the bankruptcy proceeding to demonstrate that repayment would impose an extreme burden.