What Happens If You Don’t Pay a Student Loan?

Failing to pay student loans can lead to serious financial and personal consequences. Understanding these repercussions is important for borrowers, as non-payment can impact their credit, income, and future opportunities. This awareness helps individuals navigate their financial responsibilities and avoid severe penalties.

Understanding Delinquency and Default

The process of falling behind on student loan payments begins with delinquency, distinct from default. A loan becomes delinquent the first day after a missed payment. Federal student loan delinquency is typically reported to the three major credit bureaus after 90 days. Private student loans are often reported after 30 days.

Once a loan becomes delinquent, lenders may assess late fees. For federal student loans, these can be up to 6% of the missed payment amount. Private lenders determine their own late fee structures, which could be a flat fee or a percentage of the unpaid amount. Interest continues to accrue on the outstanding balance, increasing the total amount owed.

The most widespread consequence of delinquency is damage to an individual’s credit score. Missed payments are recorded on credit reports and can significantly lower credit scores, potentially by as much as 100 points. This negative reporting remains on a credit report for up to seven years, impacting access to future credit, housing, and even certain employment opportunities.

Delinquency escalates to default after a sustained period of non-payment. For most federal student loans, default occurs when payments have been missed for approximately 270 days, or about nine months. Some federal loan types, like Federal Perkins loans, can enter default immediately upon a single missed payment. Private student loans typically default sooner, often after 90 to 180 days of missed payments, though specific timelines are determined by the individual lender.

Consequences for Federal Student Loans

Defaulting on federal student loans triggers severe consequences due to the unique collection powers held by the federal government. One of the most immediate actions is administrative wage garnishment. The government can seize up to 15% of a borrower’s disposable income directly from their paycheck without needing a court order. Borrowers are typically provided a 30-day notice before wage garnishment begins, and there is a federal protection ensuring that the borrower is left with at least $217.50 in disposable income per week.

Beyond wage garnishment, the federal government can also offset tax refunds. Through the Treasury Offset Program, both federal and state tax refunds can be seized and applied to the outstanding debt.

This program also allows for the offset of other federal payments, including Social Security benefits. Up to 15% of a borrower’s Social Security retirement or disability benefits can be withheld. A minimum of $750 per month in Social Security benefits is protected from this offset. Borrowers are generally notified 65 days before a Social Security benefit offset begins.

Default also leads to a loss of eligibility for many federal student aid programs and benefits. Borrowers in default can no longer receive additional federal student aid, such as Pell Grants or new federal loans. They also lose access to options like deferment, forbearance, and various repayment plans. The Department of Justice also retains the option to initiate lawsuits against borrowers to collect on defaulted federal loans.

In some instances, defaulting on federal student loans can affect professional licenses. Certain states have laws that allow for the suspension or non-renewal of professional licenses for individuals in default on their student loans. This consequence can directly impact a borrower’s ability to work in their chosen profession.

Discharging federal student loans through bankruptcy is possible but remains challenging. It requires filing a separate legal action, known as an adversary proceeding, to prove that repayment would impose an “undue hardship” on the borrower. The Department of Education and the Department of Justice have implemented some streamlined processes, making it somewhat more accessible for certain federal loan types, specifically Direct Loans, to be considered for discharge under this standard.

Consequences for Private Student Loans

Defaulting on private student loans carries its own set of serious repercussions, which differ from those associated with federal loans primarily in the absence of direct governmental enforcement powers. Private lenders cannot administratively garnish wages, offset tax refunds, or seize Social Security benefits without first obtaining a court order. This distinction means that private lenders must typically engage in a legal process to compel repayment.

Despite lacking these direct administrative tools, private lenders aggressively pursue collection of defaulted debts. The damage to a borrower’s credit score is severe and sustained, as negative information from missed payments and default typically remains on credit reports for seven years. This significantly impairs a borrower’s ability to obtain new credit, secure housing, or even acquire insurance. Private student loans that are considered uncollectible may also be sold to third-party collection agencies, which will then pursue the debt with their own collection methods.

A common recourse for private lenders is to file a lawsuit against the borrower to obtain a judgment for the outstanding debt. Once a court judgment is secured, the lender can then pursue actions such as wage garnishment, bank account levies, or placing liens on property. Wage garnishment for private loans, once a judgment is obtained, can be up to 25% of a borrower’s disposable income, though this percentage can vary by state law. The legal process, including the need for a court order, is a required step before these collection efforts can begin.

A significant consequence of private student loan default falls upon any co-signers. When the primary borrower defaults, the co-signer becomes fully responsible for the entire outstanding debt. This means the co-signer will face collection efforts, including potential lawsuits, wage garnishment, and damage to their own credit score.

The co-signer provides the lender with an additional party to pursue for repayment. While some private student loans may be subject to a state-specific statute of limitations, which limits the period during which a lender can sue to collect the debt, this does not erase the debt itself, and lenders may still attempt to collect through other means.