What Happens If You Dont Pay Federal Student Loans?

Federal student loans are a financial commitment, offering many individuals the opportunity to pursue higher education. Managing these loans responsibly through consistent payments is important for maintaining financial well-being.

Understanding Delinquency

A federal student loan becomes delinquent the day after a borrower misses a scheduled payment. The account is past due and remains delinquent until the overdue amount is paid or arrangements are made. If a loan payment is 90 days or more late, the loan servicer reports this delinquency to national credit bureaus. This negatively impacts a borrower’s credit rating, making it harder to obtain future credit. While delinquency is a serious issue, it is a precursor to default, but borrowers have opportunities to resolve the situation before it escalates.

What Constitutes Default

Federal 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, specifically those under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan (FFEL) Program, default happens if payments are not made for at least 270 days. Once a loan enters default, the entire unpaid balance and accrued interest may become immediately due, a process known as loan acceleration.

Specific Outcomes of Default

Defaulting on federal student loans can lead to several financial and legal consequences. These outcomes are designed to recover the outstanding debt and can affect a borrower’s financial stability for many years. Each consequence impacts different aspects of a borrower’s financial life.

Wage Garnishment

The government can seize a portion of a borrower’s wages without a court order. Up to 15% of a borrower’s disposable pay can be withheld and directed towards the defaulted loan balance. Disposable income is the amount remaining after mandatory deductions like taxes and Social Security. Before garnishment begins, the Department of Education must provide the borrower with a 30-day notice and an opportunity for a hearing.

Tax Refund Offset

Federal tax refunds can be withheld and applied directly to the defaulted loan balance. This is part of the Treasury Offset Program, which intercepts federal payments to cover outstanding debts.

Social Security Benefit Offset

A portion of Social Security benefits, including retirement and disability payments, can also be withheld. The maximum amount that can be garnished from Social Security benefits is 15%.

Loss of Eligibility for Future Federal Student Aid

Defaulting on a federal student loan makes a borrower ineligible to receive additional federal student aid. This includes grants, loans, and work-study programs.

Damage to Credit Score

A federal student loan default is reported to national credit bureaus, resulting in a negative impact on a borrower’s credit score. A poor credit rating makes it difficult to secure new loans, credit cards, housing, or certain employment opportunities. The default can remain on credit reports for up to seven years.

Ineligibility for Deferment, Forbearance, or Income-Driven Repayment Plans

Once a federal student loan is in default, borrowers lose access to flexible repayment options. This includes deferment, forbearance, and income-driven repayment plans.

Collection Costs

Borrowers are responsible for additional collection fees incurred during debt recovery, which are added to the outstanding loan balance. These fees historically ranged significantly, sometimes up to 18.5% of the outstanding balance. While many federal fees have been reduced or waived recently, their potential return adds financial burden.

Legal Action

The government can pursue legal action against a borrower to collect on a defaulted federal student loan. This may involve a lawsuit, and if a judgment is obtained, the borrower could be responsible for court costs, attorney’s fees, and other collection expenses. There is no statute of limitations on federal student loan debt, meaning collection efforts can continue indefinitely.

Pathways to Resolve Default

Several pathways exist to bring defaulted federal student loans back into good standing. Each option has specific requirements and implications for a borrower’s financial situation and credit history. Taking action to resolve default can halt collection activities and restore eligibility for certain benefits.

Loan Rehabilitation

Loan rehabilitation is a structured program designed to help borrowers exit default. It requires making a specific number of on-time, voluntary, and reasonable monthly payments. For most federal loans, this involves making nine payments within 20 days of their due date over 10 consecutive months. The payment amount is determined based on the borrower’s income and family size. Upon successful completion, the default status is removed from the borrower’s credit report, and federal student aid eligibility is restored, though prior late payments before default generally remain.

Loan Consolidation

A Direct Consolidation Loan allows combining one or more defaulted federal student loans into a new loan to resolve default. To qualify, a borrower must either make three consecutive, on-time, voluntary payments on the defaulted loan or agree to repay the new Direct Consolidation Loan under an income-driven repayment plan. Consolidating a defaulted loan removes it from default status and stops collection activities like wage garnishment and tax refund offsets. Unlike rehabilitation, consolidation does not remove the default record from a credit history, though the loan status updates to “paid by consolidation.” Applications can be completed online through StudentAid.gov.

Repaying the Loan in Full

Repaying the entire outstanding balance of the defaulted loan, including accrued interest and collection costs, is an option. While often not financially feasible, this immediately resolves the default status, halting all collection activities and restoring a borrower’s standing.

Strategies to Avoid Default

Preventative measures and proactive communication help avoid federal student loan default. Borrowers facing financial challenges have options to manage their loans and prevent delinquency or default.

Contacting Your Loan Servicer

As soon as repayment difficulties arise, contacting the loan servicer is a first step. Loan servicers can explain available options and guide borrowers through applying for alternative repayment plans or temporary payment relief, preventing escalation to delinquency or default.

Income-Driven Repayment (IDR) Plans

Income-Driven Repayment (IDR) plans adjust monthly loan payments based on a borrower’s income and family size. These plans can make payments more affordable, potentially even reducing them to zero if income is low enough.
Common IDR plans include:
Income-Based Repayment (IBR)
Income-Contingent Repayment (ICR)
Pay As You Earn (PAYE)
Saving on a Valuable Education (SAVE) Plan

Borrowers must annually recertify their income and family size. Applications can be submitted through StudentAid.gov or directly to the loan servicer.

Deferment

Deferment allows for the temporary postponement of federal student loan payments. During a deferment period, interest does not accrue on subsidized federal loans or Perkins Loans. Eligibility can arise from various circumstances, such as being enrolled in school at least half-time, unemployment, or experiencing economic hardship. Borrowers apply for deferment through their loan servicer, providing documentation to prove eligibility.

Forbearance

Forbearance also provides a temporary cessation or reduction of loan payments. Unlike deferment, interest accrues on all loan types during forbearance, including subsidized loans, meaning the total loan balance may increase over time. Common reasons for granting forbearance include financial difficulties, medical expenses, or other approved hardships. Borrowers must request forbearance from their loan servicer; it is granted for up to 12 months at a time.