What Happens If You Don’t Pay Student Loans?

Navigating student loan repayment can present challenges. Financial difficulties, unexpected unemployment, or other personal circumstances can make it difficult to meet monthly payment obligations. Failing to pay student loans carries substantial consequences. This article details the potential impacts on a borrower’s financial standing.

From Missed Payments to Default

A loan becomes delinquent the day after a payment is missed. This initial stage marks the beginning of a negative impact on a borrower’s financial record. For federal student loans, if payment is not received within 90 days of its due date, the loan servicer reports this delinquency to major national credit bureaus, damaging a borrower’s credit rating. For private student loans, the timeline for reporting delinquency can be much shorter, sometimes as few as 30 days after the due date.

Continued delinquency eventually leads to default. For most federal student loans, default occurs after 270 days of non-payment. Private student loans often enter default much sooner, frequently after 90 to 180 days of missed payments.

Once a loan becomes delinquent, late fees are often applied. For federal student loans, a late fee can be up to 6% of the overdue amount if the payment is more than 30 days late. Private lenders also charge late fees. The most immediate consequence of delinquency and default is a negative impact on a borrower’s credit score. A damaged credit score makes it more difficult and expensive to obtain future credit, such as mortgages, car loans, or credit cards. It can also affect rental applications and employment opportunities, as certain employers conduct credit checks.

Consequences for Federal Student Loans

Defaulting on federal student loans triggers a distinct set of consequences due to the government’s collection powers. One measure is administrative wage garnishment, allowing the government to withhold up to 15% of a borrower’s disposable pay directly from their employer without a court order. Borrowers receive 30 days’ notice and an opportunity for a hearing before garnishment begins.

Another consequence is the tax refund offset, where the federal government can seize a borrower’s federal income tax refunds and apply them to the defaulted loan balance. A portion of a borrower’s Social Security benefits, including retirement and disability payments, can also be withheld and applied toward the defaulted loan.

Defaulting on federal student loans results in a loss of eligibility for borrower protections and future financial aid. Borrowers lose access to deferment and forbearance options and become ineligible for income-driven repayment plans. A defaulted federal loan can prevent a borrower from receiving additional federal student aid, such as grants and new loans. The entire unpaid balance of the loan, along with accrued interest, can also become immediately due, a process known as acceleration. Collection costs are added to the outstanding loan balance, increasing the total amount owed.

Consequences for Private Student Loans

Defaulting on private student loans presents a different set of consequences compared to federal loans, as private lenders lack the same administrative collection powers. Private lenders cannot administratively garnish wages, seize tax refunds, or offset Social Security benefits without a court order. Instead, they rely on aggressive collection strategies and legal action to recover the debt.

Once a private loan enters default, the lender reports the default to major credit bureaus. This damages the borrower’s credit score, which can remain on the credit report for up to seven years. The lender may also accelerate the loan, making the entire outstanding balance immediately due.

Private lenders frequently engage third-party collection agencies to pursue the debt. These agencies may employ persistent communication methods, including calls and letters, and can add substantial collection fees to the outstanding balance. If a loan has a co-signer, that individual becomes equally responsible for the debt once the primary borrower defaults. The lender can pursue the co-signer for the full amount, impacting their credit score and potentially leading to legal action against them.

Enforcement Measures and Legal Actions

Once a student loan, whether federal or private, enters default, various enforcement measures and legal actions can be initiated to recover the outstanding debt. Collection agencies often become involved, reaching out to borrowers through frequent phone calls, letters, and emails in an attempt to secure payment. These agencies report the defaulted status to credit bureaus.

Lenders, particularly private ones, may file a lawsuit against the borrower to obtain a judgment for the outstanding debt. This legal process begins with the borrower receiving a summons, requiring a court appearance. If the lender wins the lawsuit, a court judgment is issued, legally confirming the debt and granting the lender more powerful collection tools.

With a court judgment, lenders can pursue post-judgment enforcement actions. This includes bank account levies, where funds can be directly seized from a borrower’s bank account. Another measure is court-ordered wage garnishment, distinct from federal administrative garnishment. This requires a court order and allows a portion of the borrower’s wages to be withheld, typically up to 25% of disposable earnings. A judgment can also lead to property liens, where a legal claim is placed against a borrower’s real estate.

While federal student loans do not have a statute of limitations, meaning the government can pursue collection indefinitely, private student loans are subject to state-specific statutes of limitations, typically ranging from three to ten years, which limit the time a lender can sue to collect the debt. Even if the statute of limitations expires, the debt remains owed, and collection efforts may continue, though legal action is no longer possible.