What Happens If You Don’t Pay Student Loans?

Understanding the implications of non-payment is crucial for student loan borrowers, as consequences differ significantly between federal and private loans. Navigating these distinctions can help individuals prepare for and address potential financial challenges.

Understanding Delinquency and Default

Missing a student loan payment begins with delinquency. A loan is delinquent the day after a payment is missed. For federal student loans, delinquency is reported to national credit bureaus after 90 days, negatively affecting credit scores.

Continued delinquency leads to default. Federal student loans default after 270 days (nine months) of missed payments. Private student loans default sooner, often after 120 to 180 days (four to six months), though timelines vary by lender. Upon default, the entire loan balance may become immediately due, a process known as loan acceleration. Default is reported to credit bureaus and can remain on credit reports for up to seven years, severely impacting future credit opportunities.

Consequences for Federal Student Loans

Defaulting on federal student loans triggers consequences, as the government can collect outstanding debt. Wage garnishment allows up to 15% of a borrower’s disposable income to be withheld from paychecks without a court order. This administrative garnishment means no prior lawsuit is needed. Federal law ensures borrowers are left with at least 30 times the federal minimum wage per week.

The federal government can intercept tax refunds through the Treasury Offset Program to satisfy defaulted student loan debt. The program also allows offset of Social Security benefits (retirement and disability), up to 15% of the monthly benefit. A minimum amount of Social Security income remains untouched. Supplemental Security Income (SSI) and Veterans Affairs (VA) disability benefits are exempt from this offset.

Upon default, borrowers lose eligibility for future federal student aid, including grants and new loans. Access to repayment options like deferment, forbearance, and income-driven repayment plans is revoked. The loan balance can also increase due to added collection costs.

Consequences for Private Student Loans

Defaulting on private student loans leads to consequences involving legal action from the lender. Unlike federal loans, private lenders must obtain a court judgment to pursue collection actions such as wage garnishment or bank account levies. If a lawsuit is successful, the lender can pursue seizure of bank accounts or other assets. Wage garnishment for private loans can be up to 25% of disposable income, higher than for federal loans, but still requires a court order.

Private student loan default impacts co-signers. Co-signers become fully responsible for the debt upon default, facing the same collection actions, including lawsuits and credit damage. Lenders often sell defaulted loans to third-party collection agencies. These agencies are subject to the Fair Debt Collection Practices Act. Private loans have a statute of limitations for legal action (varying by state, often three to ten years), but the debt does not disappear, and collection attempts may continue.

Steps to Address Non-Payment

Addressing student loan non-payment proactively can mitigate consequences. For delinquent loans, contacting the loan servicer is important to explore options before default. Federal loan borrowers may utilize deferment or forbearance to temporarily pause payments.

Deferment allows for a payment pause for specific circumstances (e.g., unemployment, military service, re-enrollment), and interest on subsidized loans does not accrue during this period. Forbearance also allows for a payment pause for up to 12 months, but interest continues to accrue on all loan types. Enrolling in an Income-Driven Repayment (IDR) plan for federal loans can adjust monthly payments based on income and family size, making them more affordable.

For federal loans already in default, two primary strategies exist to resolve the status: loan rehabilitation and loan consolidation. Loan rehabilitation involves making nine voluntary, on-time monthly payments over 10 consecutive months. Successful rehabilitation removes the record of default from the borrower’s credit history and restores eligibility for federal student aid and repayment benefits.

Loan consolidation allows borrowers to combine multiple defaulted federal loans into a new Direct Consolidation Loan, immediately bringing them out of default. To qualify for consolidation, borrowers must agree to repay the new loan under an IDR plan or make three consecutive, on-time payments on the defaulted loan first. Consolidation provides a quicker path to regaining federal aid eligibility than rehabilitation.

For private student loans in default, options are more limited but still exist. Negotiating directly with the lender or collection agency is a common approach. This can involve discussing a settlement, where the lender may agree to accept a lump-sum payment for a reduced amount of the debt. Refinancing the private loan, if eligible, could also lead to more manageable terms.

While bankruptcy is not a common solution for student loan debt, it is possible under certain circumstances, particularly if a borrower can demonstrate “undue hardship.” This requires an additional legal process within the bankruptcy case.