What Happens If You Don’t Pay Student Debt?

Student loan debt is a significant financial consideration for millions in the United States. The majority of this debt, about 91.6%, consists of federal student loans, while private loans make up the remaining portion. Understanding the potential outcomes of failing to meet repayment obligations is important.

When Debt Becomes Unpaid

Student loans progress through distinct stages when unpaid, beginning with delinquency and potentially escalating to default. A loan becomes delinquent the day after a borrower misses a scheduled payment. This status is typically reported to national credit bureaus if the payment remains overdue for 90 days or more, negatively affecting the borrower’s credit score. Resolving delinquency often involves catching up on missed payments or arranging a new repayment plan with the loan servicer.

If delinquency continues without resolution, a loan moves into default. For most federal student loans, default typically occurs after 270 days (approximately nine months) of missed payments. Private student loans generally default sooner, often after 120 to 180 days of missed payments. Once a loan enters default, the entire unpaid balance and any accrued interest may become immediately due, a process known as acceleration.

Consequences for Federal Student Loans

Defaulting on federal student loans has serious consequences due to the government’s unique collection powers. A default significantly harms a borrower’s credit score, making it challenging to secure future credit, housing, or even certain types of employment. The negative mark can remain on a credit report for up to seven years.

The federal government can also initiate administrative wage garnishment without a court order once a loan is in default. Up to 15% of a borrower’s disposable pay can be withheld from their paycheck and applied directly to the defaulted loan. Disposable pay refers to the amount remaining after taxes and other mandatory deductions. This garnishment continues until the defaulted loan is either paid in full or removed from default status.

The Treasury Offset Program (TOP) allows the government to seize federal payments, such as income tax refunds, to repay defaulted federal student loan debt. This program can also intercept Social Security benefits, including disability payments. These offsets can occur without prior court approval.

Borrowers in federal student loan default lose eligibility for benefits and future financial aid. They lose access to additional federal student aid, such as grants or new federal loans, which can hinder educational pursuits. Access to beneficial repayment programs like deferment, forbearance, and income-driven repayment plans is typically forfeited.

Defaulted federal loans may also incur collection costs. These fees can be significant, increasing the total amount owed. They cover expenses incurred by the government or its collection agencies in pursuing the unpaid debt.

Consequences for Private Student Loans

Defaulting on private student loans has repercussions that often differ from federal loans. A private loan default will severely damage a borrower’s credit score, making it difficult to obtain new credit, rent apartments, or even secure certain jobs. Private lenders may report delinquencies to credit bureaus more quickly than federal loan servicers.

Private lenders or their appointed collection agencies will typically engage in aggressive collection efforts, including frequent phone calls and letters. If these efforts are unsuccessful, private lenders are more likely to pursue legal action by filing a lawsuit against the borrower.

Should a private lender win a lawsuit, they can obtain a court judgment, which then allows them to pursue involuntary collection methods. This can include court-ordered wage garnishment, bank account levies, or liens on property. Unlike federal loans, these actions generally require a specific court order.

Private student loans commonly require a co-signer. If the primary borrower defaults, the co-signer becomes equally responsible for the entire debt. This means the co-signer’s credit will also be negatively impacted, and they too can face collection efforts, including lawsuits, wage garnishment, or bank levies. Some private loan agreements may even include “auto-default” clauses, where the loan can immediately default upon the death of a co-signer.

Defaulting on a private student loan can lead to further costs. Lenders may add significant late fees and other administrative penalties as outlined in the loan agreement. The outstanding balance will continue to accrue interest, and in some cases, the interest rate may increase upon default, further escalating the total amount owed.