What Happens If You Don’t Pay Your Student Loan?

Understanding repayment obligations is fundamental for student loan borrowers. Timely payments are important for maintaining financial stability and protecting credit history.

Understanding Delinquency and Default

The initial stage of missed student loan payments is known as delinquency, which begins the day after a payment is due. For federal student loans, servicers typically report delinquency to national credit bureaus after 90 days of missed payments, which can negatively impact a borrower’s credit rating. Private student loan lenders may report delinquencies to credit bureaus much sooner, often after just 30 days.

If delinquency continues, a loan can progress to a more severe status: default. For most federal student loans, including Direct Loans and Federal Family Education Loan (FFEL) Program loans, default occurs when payments have not been made for at least 270 days, or approximately nine months. Federal Perkins Loans can sometimes be declared in default even sooner, immediately upon a missed payment.

Private student loan default terms are determined by the individual loan agreement and can vary among lenders. Generally, private loans are considered in default after 120 to 180 days, or about four to six months, of missed payments. Some private loan agreements may even define default after only one missed payment. Once a private loan enters default, the lender may demand immediate payment of the entire outstanding balance, a process known as acceleration.

Direct Consequences of Not Paying

Failing to make student loan payments has significant consequences for a borrower’s financial health. Both delinquency and default are reported to credit bureaus, causing substantial damage to credit scores. A defaulted loan can remain on a credit report for up to seven years, making it difficult to secure new credit, such as car loans, mortgages, or even credit cards.

For federal student loans, the government possesses powerful tools to collect defaulted debt without needing a court order. One such tool is wage garnishment, where up to 15% of a borrower’s disposable income can be withheld directly from their paycheck. Before wage garnishment begins, the borrower typically receives a 30-day notice and has the opportunity to request a hearing.

Another consequence for defaulted federal student loans is the offset of federal tax refunds through the Treasury Offset Program (TOP). This means that any federal income tax refund due to the borrower can be intercepted and applied directly to the outstanding defaulted loan balance. Borrowers are usually notified before an offset occurs.

Federal student loan default can also lead to the offset of Social Security benefits. Under the Treasury Offset Program, up to 15% of a borrower’s Social Security retirement or disability benefits can be withheld to repay defaulted federal student loans. A minimum monthly benefit of $750 is protected from this offset. However, Supplemental Security Income (SSI) and Veterans Affairs (VA) benefits are generally exempt from such offsets.

A borrower in default on federal student loans loses eligibility for further federal student aid, which can hinder educational pursuits. Additionally, options like deferment and forbearance, which allow for temporary postponement of payments, are typically no longer available once a loan enters default. This removes valuable safety nets for borrowers experiencing financial hardship.

Defaulted loans, both federal and private, are often transferred to collection agencies. These agencies can add collection costs to the outstanding balance. For federal loans, historical collection fees could be up to 25% of the outstanding balance, though recent policies have seen some fees reduced or waived. Private lenders also charge collection fees, often ranging from 20% to 25%, as outlined in the loan agreement.

Lenders or the government may initiate legal action to recover the full amount of the defaulted loan. For private student loans, lenders usually need to obtain a court judgment before they can garnish wages or freeze bank accounts. This legal process can result in additional court costs and attorney fees being added to the borrower’s debt.

Paths to Resolution

For defaulted federal student loans, specific programs help bring loans back into good standing. One pathway is loan rehabilitation. This process requires the borrower to make nine voluntary, reasonable, and affordable monthly payments within a ten-month period. Each payment must be received within 20 days of its due date to be considered on time.

Upon successful completion of loan rehabilitation, the default status is removed from the borrower’s credit history. While the record of default is erased, any late payments that occurred before the loan entered default will typically remain on the credit report for seven years. Completing rehabilitation also restores eligibility for federal student aid and other benefits, such as deferment and forbearance, and ends wage garnishment or tax refund offsets. A borrower is generally allowed to rehabilitate a defaulted loan only once.

Another option for federal loans is loan consolidation. This involves combining one or more defaulted federal student loans into a new Direct Consolidation Loan. To qualify for consolidation, a borrower must either agree to repay the new consolidated loan under an Income-Driven Repayment (IDR) plan or make three consecutive, on-time, full monthly payments on the defaulted loan before consolidation. Consolidation effectively removes the loan from default status and halts collection activities. However, unlike rehabilitation, consolidation does not remove the default record from the borrower’s credit report; instead, the original defaulted loan will be marked as paid. Collection fees may be added to the new principal balance of the consolidated loan.

For private student loans, the resolution process differs significantly as there are no standardized federal programs like rehabilitation or consolidation. The primary approach for resolving a defaulted private loan is to directly contact the lender. Lenders may be willing to discuss various options, such as modified payment plans to reduce monthly payments, temporary forbearance, or even settlement agreements where the borrower pays less than the full amount owed to resolve the debt.

The availability of these options for private loans depends entirely on the individual lender’s policies and the terms of the original loan agreement. Formal rehabilitation programs, similar to those offered for federal loans, are uncommon for private student loans. Negotiating directly with the lender can be a way to avoid further legal action and manage the debt, but the terms will vary case by case.