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

Student loans represent a significant financial commitment. Failure to meet repayment terms can lead to various financial repercussions. This article details the sequence of events and impacts that can occur when student loan payments are not made as scheduled.

Immediate Consequences of Delinquency

Missing a student loan payment initiates a status known as delinquency. The loan account remains delinquent until the overdue amount is paid or alternative arrangements are made with the loan servicer.

For federal student loans, late fees may be assessed if a payment is not received within a grace period, typically 15 to 30 days past the due date. The U.S. Department of Education no longer assesses late fees on federally-held direct loans. Private student loans, conversely, often impose late fees, which can range from a percentage of the unpaid amount to a flat fee, depending on the lender’s terms.

A more significant consequence of delinquency emerges after a sustained period of non-payment. If federal student loan payments are 90 days or more past due, the loan servicer will report this delinquency to national credit bureaus. This negative reporting can substantially impact a borrower’s credit score. Private lenders often report late payments to credit bureaus after 30 days. This reduction in credit score can hinder access to other forms of credit.

Understanding Default and Its Ramifications

Delinquency progresses into default if payments continue to be missed over an extended period. For most federal student loans, default typically occurs when payments are not made for approximately 270 days. Federal Perkins loans can default immediately upon a missed payment, depending on the terms. Private student loans generally default much sooner, often after three missed monthly payments.

Once a federal student loan enters default, the entire unpaid balance can become immediately due, a process known as acceleration. This status also eliminates eligibility for federal student aid, including future loans, grants, and certain repayment plans.

The federal government possesses powerful collection tools that do not require a court order. One such tool is wage garnishment, where up to 15% of a borrower’s disposable pay can be withheld directly from their paycheck.

Another significant consequence of federal student loan default is the Treasury Offset Program. This program allows the government to intercept federal payments, such as income tax refunds, and apply them directly to the defaulted loan balance. Social Security benefits, including retirement and disability payments, can also be offset by up to 15% to cover the debt, though a minimum monthly amount is protected. These offsets continue until the loan is paid off or brought out of default.

Furthermore, collection costs are added to the outstanding balance of defaulted loans. For federal loans, these fees can amount to as much as 18.5% of the outstanding principal and accrued interest. Private student loans also incur collection costs, which can be up to 25% of the defaulted loan balance. These additional costs increase the total debt owed, making repayment more challenging. The default status remains on a credit report for up to seven years from the date of the first missed payment that led to default, or from the date of the loan’s transfer to the Department of Education.

Strategies for Resolving Delinquency and Default

For federal student loans, several structured pathways exist to address delinquency and default. One significant option is loan rehabilitation, which allows borrowers to bring their defaulted loan back into good standing. To rehabilitate a federal loan, a borrower typically must make nine consecutive, on-time, voluntary monthly payments, with each payment considered reasonable and affordable based on income. Successfully completing rehabilitation removes the default status from the borrower’s credit report, though previously reported late payments remain. This process also reinstates eligibility for federal student aid and various repayment plans.

Another strategy is federal loan consolidation, where multiple federal education loans are combined into a single new Direct Consolidation Loan. This can simplify repayment by reducing multiple monthly payments to one. Crucially, consolidating a defaulted federal loan can bring it out of default and grant access to additional income-driven repayment (IDR) plans and loan forgiveness programs. The interest rate on a consolidated loan is a weighted average of the original loans’ rates, rounded up to the nearest one-eighth of a percentage point.

Income-Driven Repayment (IDR) plans are designed to make federal student loan payments affordable by basing them on a borrower’s income and family size. Available IDR plans include Pay As You Earn (PAYE), Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Saving on a Valuable Education (SAVE) Plan. Payments under these plans can be as low as $0 per month for some individuals, and any remaining loan balance may be forgiven after 20 to 25 years of qualifying payments, though the forgiven amount might be considered taxable income. Enrolling in an IDR plan can prevent a loan from going into default or help manage payments after rehabilitation or consolidation.

For private student loans, the options for resolving delinquency or default are less standardized and depend heavily on the individual lender’s policies. Borrowers experiencing difficulty should contact their lender directly to discuss potential solutions. These might include temporary payment relief options such as forbearance, which allows for a temporary suspension or reduction of payments. Some lenders may also offer loan modifications, which could involve adjusting the loan terms to make payments more manageable. In certain situations, particularly when a loan is severely delinquent or in default, a lender might consider a settlement for a reduced amount, though this is not guaranteed and often depends on the borrower’s ability to make a lump-sum payment or a series of payments.

Key Distinctions Between Federal and Private Student Loans

The consequences of not paying student loans and the available resolution strategies differ significantly between federal and private loans. Federal student loans are backed by the U.S. government and come with a comprehensive set of borrower protections and repayment programs. These include standardized timelines for delinquency and default. The federal government also has unique administrative collection powers, including the ability to garnish wages and offset tax refunds or Social Security benefits without a court order, once a loan is in default. Federal loans offer robust income-driven repayment plans, which adjust monthly payments based on a borrower’s income and family size, potentially leading to loan forgiveness after a specified period. They also provide options like deferment and forbearance for temporary payment pauses due to financial hardship, and structured pathways such as loan rehabilitation and consolidation to bring defaulted loans back into good standing. In contrast, private student loans are issued by banks, credit unions, and other private lenders, and generally lack the same level of borrower protections. Default timelines for private loans are often shorter. Private lenders do not possess the same administrative collection powers as the federal government. To garnish wages or seize assets, private lenders must typically sue the borrower in court and obtain a judgment. Resolution options for private loans are not standardized across lenders and are often less flexible than federal programs. The terms and conditions for private loans, including late fees and default protocols, are specified in the individual promissory note, making it important for borrowers to understand their specific loan agreement.