What Happens If You Don’t Pay Student Loans?

Student loans represent a substantial financial commitment. Failing to make timely payments can initiate a series of escalating consequences that affect a borrower’s financial standing and future opportunities. Understanding these potential repercussions is important for anyone managing student loan debt.

Understanding Delinquency and Default

Missing a scheduled student loan payment marks the beginning of delinquency. A loan becomes delinquent the day after a payment due date is missed. This status indicates to the loan servicer that the borrower has not fulfilled their contractual payment obligation.

Delinquency continues until the missed payment, along with any accrued interest or late fees, is made. If the loan remains unpaid for an extended period, it can progress from delinquency to default. For most federal student loans, default typically occurs after 270 days of non-payment.

Private student loans do not have a standardized timeline for default; their terms are determined by the individual loan agreement. A private student loan can enter default status much sooner than a federal loan, sometimes after just one missed payment. The progression from delinquency to default triggers more severe consequences.

Consequences for Federal Student Loans

Defaulting on federal student loans triggers a range of significant consequences. One immediate action is administrative wage garnishment (AWG), where a portion of a borrower’s disposable pay can be withheld directly from their employer. The Department of Education can garnish up to 15% of a borrower’s disposable income without a court order.

Another consequence is the offset of federal payments, including tax refunds. The Treasury Offset Program allows the government to intercept federal income tax refunds, and in some cases, state tax refunds, to apply towards the defaulted student loan balance. A borrower expecting a refund may find it entirely withheld and applied to their debt.

Social Security benefits can also be subject to offset for defaulted federal student loans. A portion of a borrower’s Social Security retirement or disability benefits can be withheld, though protections ensure a minimum benefit amount remains. This measure helps the government recover funds from various income streams.

A borrower in federal student loan default loses eligibility for further federal student aid, including Pell Grants and other federal loans, which can hinder educational pursuits. They also lose access to beneficial repayment options, such as deferment, forbearance, and income-driven repayment plans. The entire outstanding balance of the defaulted loan may also be accelerated, meaning the full amount becomes immediately due and payable.

The loan balance will also increase due to collection costs, which can be substantial. These costs are typically added to the principal balance and can range from 18% to 25% of the outstanding debt, significantly increasing the total amount owed. The default is reported to the major credit bureaus, leading to a negative impact on the borrower’s credit score. This can make it difficult to obtain future credit, secure housing, or qualify for employment opportunities, as the default remains on a credit report for seven years.

Consequences for Private Student Loans

Defaulting on private student loans leads to a distinct set of consequences, often differing from federal loans. Unlike federal loans, private lenders generally cannot use administrative offsets like tax refund interceptions or Social Security benefit garnishments without a court order. Instead, private lenders typically engage collection agencies to recover the debt.

If collection efforts are unsuccessful, private lenders frequently file lawsuits to obtain a judgment against the borrower. A court judgment grants the lender legal authority to pursue more aggressive collection actions. This can include court-ordered wage garnishment, where a percentage of the borrower’s earnings is withheld by their employer and sent directly to the lender.

A judgment can also lead to bank account levies, allowing the lender to freeze and seize funds from the borrower’s bank accounts up to the amount of the judgment. Additionally, a property lien may be placed on real estate owned by the borrower, which could complicate or prevent the sale or refinancing of the property until the debt is satisfied. These actions often require a formal legal process.

Cosigners on private student loans bear the same legal responsibility for the debt as the primary borrower. If the primary borrower defaults, the cosigner becomes fully liable for the outstanding balance, interest, and any collection fees. This can severely impact the cosigner’s credit score and expose their assets to the same collection actions, including lawsuits, wage garnishment, and bank levies.

Private loan defaults are reported to credit bureaus, causing significant damage to the borrower’s credit score. This negative mark can remain on a credit report for up to seven years, making it challenging to qualify for new loans, credit cards, mortgages, or even rental agreements.

Paths to Resolving Non-Payment

Resolving federal student loan default often begins with loan rehabilitation, a structured program designed to bring a defaulted loan back into good standing. This process typically requires the borrower to make nine voluntary, reasonable, and affordable monthly payments within a 10-month period. Upon successful completion, the default status is removed from the borrower’s credit report, and eligibility for federal student aid and repayment benefits is restored.

Another option for federal loan default resolution is loan consolidation through a Direct Consolidation Loan. This allows a borrower to combine one or more defaulted federal student loans into a new Direct Consolidation Loan, effectively taking them out of default. To qualify, the borrower must either agree to repay the new loan under an income-driven repayment plan or make three consecutive, on-time monthly payments on the defaulted loan before consolidating. The consolidation creates a new loan with new terms and a single monthly payment, which can simplify repayment and make it more manageable.

Enrolling in an income-driven repayment (IDR) plan can prevent default or help manage payments after consolidating out of default for federal loans. IDR plans adjust monthly payments based on the borrower’s income and family size, potentially reducing payments to as low as $0 per month. Borrowers must submit annual documentation of their income and family size to maintain eligibility and adjust their payment amount.

For both federal and private student loans, negotiation or settlement may be possible, though it is often a complex process. This involves reaching an agreement with the lender or collection agency to pay a lump sum that is less than the total amount owed. While this can reduce the debt, any amount of debt forgiven through a settlement may be considered taxable income by the Internal Revenue Service, potentially leading to a tax liability.

Bankruptcy is an extremely difficult and rare path for student loan discharge. Student loans are generally not dischargeable in bankruptcy unless the borrower can prove “undue hardship,” a legal standard that is very challenging to meet. This typically requires a separate court proceeding where the borrower must demonstrate that they cannot maintain a minimal standard of living, that this hardship is likely to persist for a significant portion of the repayment period, and that they have made a good faith effort to repay the loans.