What Happens If You Don’t Pay Back Student Loans?

Student loans enable individuals to pursue higher education, representing a binding financial commitment requiring repayment with interest. Failing to meet the terms of a student loan agreement can lead to escalating consequences that affect a borrower’s financial standing and future opportunities.

Early Stages of Non-Payment

Missing a student loan payment leads to delinquency. A loan becomes delinquent the day after a scheduled payment is missed. For federal student loans, delinquency is reported to the three major national credit bureaus—Equifax, Experian, and TransUnion—after 90 days of non-payment. Private student loan lenders may report delinquency to credit bureaus as early as 30 days after a missed payment.

The immediate impact of delinquency is a negative entry on the borrower’s credit report, causing a decrease in their credit score. A lower credit score can make it challenging to secure favorable interest rates for future loans, such as car loans or mortgages, and may affect the ability to rent an apartment or obtain certain utility services. Loan servicers or lenders contact the borrower soon after a missed payment through phone calls, letters, and emails.

Should payments remain unmade, a delinquent loan progresses to default. For most federal student loans, default occurs when payments have been missed for 270 days (nine months). Private student loans have varying default timelines, with some lenders declaring a loan in default after just three missed monthly payments (90 days). Once a loan enters default, the entire outstanding balance becomes immediately due.

Federal Loan Collection Actions

Once a federal student loan enters default, the U.S. government possesses several mechanisms to recover the outstanding debt, often without needing a court order. One such mechanism is administrative wage garnishment, where a portion of a borrower’s disposable income can be directly withheld from their paycheck. The Department of Education can garnish up to 15% of a borrower’s disposable pay to satisfy the defaulted loan. Before wage garnishment begins, the borrower receives a 30-day notice, providing an opportunity to request a hearing to dispute the garnishment or arrange a repayment plan.

Another collection tool is the Treasury Offset Program, which allows the government to intercept federal payments owed to the borrower. This includes federal income tax refunds, and state tax refunds, which are then applied directly to the defaulted student loan balance. Borrowers are notified about a pending tax refund offset 65 days before the offset occurs, along with instructions on how to contest it.

The government can also offset a portion of a borrower’s Social Security benefits, including retirement and disability payments, through the Treasury Offset Program. This offset is limited to 15% of the monthly benefit amount, and a minimum of $750 per month must be protected from collection. This measure can reduce a borrower’s fixed income, impacting their ability to cover essential living expenses.

Defaulting on federal student loans also results in the loss of eligibility for further federal student aid. This means a borrower will be unable to receive new federal grants, loans, or work-study funds for future educational pursuits until the defaulted loan is resolved. This restriction can hinder a borrower’s ability to complete their education or pursue additional training.

Other Significant Consequences

Beyond the direct collection actions by the federal government, defaulting on student loans can trigger other financial repercussions. One such consequence, which varies by jurisdiction, involves the suspension or revocation of professional licenses. While many states have repealed or modified such laws, some still allow for the suspension or denial of professional licenses for certain occupations if a borrower is in default on their student loans. This can prevent individuals from legally practicing their profession and earning a living.

Lenders, particularly private student loan lenders, may pursue legal action against borrowers who default on their loans. Unlike federal loan collection, private lenders must obtain a court order or judgment before they can pursue actions like wage garnishment or bank account levies. Once a judgment is secured, lenders can pursue collection through various means, including seizing funds from bank accounts or placing liens on real property.

Defaulting on student loans damages a borrower’s credit history and credit score, which can persist for up to seven years on their credit report. This negative mark can make it difficult to obtain other types of credit, such as mortgages, car loans, or credit cards, leading to higher interest rates. It can also impact other aspects of financial life, including insurance premiums and the ability to sign up for utility services.

A distinction between federal and private loans lies in their dischargeability in bankruptcy. Student loans are difficult to discharge in bankruptcy, whether federal or private. To have student loan debt discharged through bankruptcy, borrowers must demonstrate “undue hardship” in a separate legal proceeding, a standard that courts interpret strictly and is challenging to meet. This means that, unlike most other forms of consumer debt, the obligation to repay student loans persists even after filing for bankruptcy. Federal student loans also do not have a statute of limitations for collection, meaning the government can pursue the debt indefinitely. Private student loans, conversely, are subject to state-specific statutes of limitations, which vary but range from three to ten years, limiting the timeframe within which a lender can sue to collect the debt.