What Happens If You Don’t Make Student Loan Payments?

Missing student loan payments can trigger a series of consequences that escalate in severity, impacting financial well-being and future opportunities. This article outlines the repercussions that can arise when student loan payments are not made as agreed, from initial missed payment effects to the more severe outcomes of loan default. It also details the distinct differences between federal and private student loans and provides information on the available pathways for resolving delinquency and default.

Immediate Repercussions of Missed Payments

A student loan becomes delinquent the moment a payment is missed. While delinquent, the servicer or lender typically applies late fees, which can be a flat amount or a percentage of the overdue payment, increasing the total debt owed.

Delinquency impacts a borrower’s credit score, though the timing differs between loan types. Federal student loan delinquency is usually reported to national credit bureaus after 90 days of missed payments. Private loan lenders may report delinquency sooner, sometimes after just 30 days. This reporting can cause a credit score to drop, making it more challenging to secure future credit, loans, or housing.

Borrowers can expect increased communication from their loan servicer, including calls, emails, and letters, reminding them of missed payments. These communications also present an opportunity to discuss potential solutions before the situation escalates. Addressing delinquency promptly can help mitigate its negative effects on a borrower’s financial standing.

The Consequences of Student Loan Default

Student loan default represents a more severe stage of non-payment, carrying long-lasting financial repercussions. For most federal student loans, default occurs after 270 days of missed payments. Private student loans can enter default more quickly, sometimes after 90 to 120 days, though this timeframe can vary by lender. Once a loan enters default, the entire unpaid balance and any accrued interest can become immediately due, a process known as acceleration.

Federal student loan default triggers various collection actions. The government can garnish a portion of a borrower’s wages without a court order, typically up to 15% of disposable income. Tax refunds can also be withheld through the Treasury Offset Program and applied toward the defaulted loan. In some cases, a portion of Social Security benefits, up to 15%, may be offset to repay the debt, provided the remaining monthly benefit does not fall below a certain threshold.

Beyond these direct financial seizures, federal loan default leads to a loss of eligibility for future federal student aid, including grants and new loans. Borrowers also lose access to repayment options like deferment, forbearance, and income-driven repayment plans until the default is resolved. Collection costs, typically between 20% to 25% of the outstanding principal and interest, are added to the loan balance, further increasing the total debt. The government or its collection agencies may initiate legal action to recover the debt, leading to potential court costs and attorney fees. Credit score damage from default can persist on a credit report for up to seven years, hindering opportunities for mortgages, car loans, and credit cards.

Federal vs. Private Student Loan Differences

Student loans include two primary categories: federal and private, each with distinct characteristics that lead to varied consequences when payments are missed. Federal student loans, issued or guaranteed by the U.S. Department of Education, offer greater borrower protections and repayment flexibility. Private student loans, offered by banks, credit unions, and other financial institutions, typically have fewer borrower-friendly provisions.

A key distinction lies in their regulatory frameworks and consumer protections. Federal loans come with safeguards like income-driven repayment (IDR) plans, which adjust monthly payments based on income and family size, potentially reducing payments to $0. They also offer standardized deferment and forbearance options for temporary payment pauses due to circumstances like unemployment or economic hardship. Private loans generally lack these robust repayment plans, and their deferment or forbearance options are often more limited, varying by lender and potentially accruing interest during the pause.

The nature of collection actions also differs significantly. The federal government possesses unique statutory powers to recover defaulted debts, such as administrative wage garnishment without a court order and the ability to offset tax refunds and Social Security benefits. Private lenders, in contrast, must typically obtain a court judgment before they can garnish wages or seize assets, and they do not have the authority to intercept federal tax refunds or Social Security benefits. While both federal and private loan defaults severely impact credit scores, federal student loans are generally much harder to discharge through bankruptcy compared to private loans, which may have a slightly higher, though still difficult, chance of discharge depending on individual circumstances and state laws.

Resolving Delinquency and Default

Addressing student loan delinquency or default requires proactive engagement with loan servicers or the Department of Education. For loans that are merely delinquent, before entering default, borrowers have options to prevent further escalation. Catching up on missed payments is the most direct solution, but if not feasible, contacting the loan servicer immediately is important to explore alternatives. Loan servicers can discuss options like changing repayment plans, including enrolling in an Income-Driven Repayment (IDR) plan for federal loans, which can significantly lower monthly payments based on income and family size. Temporary relief options such as deferment or forbearance may also be available, allowing for a pause in payments for eligible federal loans due to circumstances like unemployment or economic hardship.

Once a federal student loan has entered default, structured programs are available to bring the loan back into good standing. Loan rehabilitation is a common pathway, requiring borrowers to make nine voluntary, reasonable, and on-time monthly payments within a 10-month period. Successfully completing rehabilitation removes the default from a borrower’s credit report and restores eligibility for federal student aid and repayment plan options.

Another option is loan consolidation, where a new Direct Consolidation Loan pays off the defaulted federal loan. To consolidate a defaulted loan, borrowers typically must either agree to repay the new consolidation loan under an IDR plan or make three consecutive, on-time payments on the defaulted loan first. While consolidation gets the loan out of default and stops collection activities, it does not remove the record of the default from the borrower’s credit history. Paying the loan in full is also a resolution, though often impractical for many borrowers.

For private student loans in default, options are generally more limited and depend on the specific lender’s policies. Private lenders do not offer standardized federal programs like rehabilitation or IDR plans. Borrowers in default on private loans may be able to negotiate directly with their lender for a modified payment plan, a temporary period of reduced payments, or a settlement for a lower lump sum amount. This negotiation often requires persistence and may benefit from the assistance of a financial counselor. Private lenders must pursue legal action to garnish wages or seize assets, which may provide an opportunity for negotiation before a court judgment is obtained.