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

Not paying student loans can lead to severe and lasting financial repercussions. Unlike most other forms of debt, student loans are generally not dischargeable through standard bankruptcy proceedings, making them a persistent obligation. Lenders and the government possess significant tools to recover defaulted debt, underscoring the serious nature of these financial commitments.

The Path to Default

Missing a student loan payment initiates delinquency. A loan becomes delinquent the day after a payment is missed. Federal loan servicers typically report late payments to credit bureaus after 90 days, while private servicers may report sooner, sometimes after 30 days. During delinquency, borrowers may receive reminder calls, emails, and letters. Late fees may also be assessed, increasing the amount owed.

If payments continue to be missed, the loan progresses from delinquency to default. For most federal student loans, default occurs when payments are 270 days past due. Federal Perkins Loans can enter default immediately upon a missed payment. Private student loans often default sooner, sometimes after three missed monthly payments (90 to 180 days), depending on the loan agreement. Once a loan enters default, the entire unpaid balance can become immediately due, a process known as acceleration. At this point, the loan holder typically transfers the debt to a collection agency.

Direct Financial and Legal Repercussions

Defaulting on student loans carries significant financial and legal consequences. One immediate impact is severe damage to a borrower’s credit score. Both delinquency and default are reported to credit bureaus, making it difficult to obtain future loans, credit cards, mortgages, or even rent apartments. This negative credit history can persist for up to seven years from initial delinquency.

The federal government has powerful tools to collect defaulted loans. They can initiate administrative wage garnishment, withholding a portion of a paycheck to repay the debt. Up to 15% of disposable pay can be garnished without a court order; borrowers can negotiate repayment terms or request a hearing. Federal and state tax refunds can also be seized through the Treasury Offset Program to satisfy defaulted loan debt. Borrowers receive a letter before their tax refund is taken the first time, notifying them of the offset and their right to request a hearing.

For older borrowers with defaulted federal loans, a portion of Social Security benefits can be withheld. Up to 15% of monthly Social Security Disability or retirement benefits can be offset, provided the remaining benefit stays above $750. The government paused Social Security offsets for defaulted student loans in June 2025. However, the Department of Education has stated that involuntary collections on defaulted loans, including tax refund intercepts and wage garnishments, resumed on May 5, 2025.

Defaulting on federal student loans results in loss of eligibility for future federal financial aid, including grants, work-study, and new federal student loans. Some states allow suspension or revocation of professional licenses for individuals with defaulted student loans, which can impede earning potential. Private lenders, lacking federal administrative powers, typically must sue borrowers to obtain a judgment before pursuing collection actions like wage garnishment or bank account levies. Collection fees, additional interest, and penalties are added to the outstanding balance once a loan defaults, increasing the total amount owed. Collection costs on federal loans can be up to 25% of the outstanding principal and interest balance, or up to 20% of each payment.

Understanding Federal and Private Loan Differences

The collection mechanisms and borrower protections vary significantly between federal and private student loans. Federal loans are backed by the U.S. government, granting them unique administrative collection powers. The federal government has no statute of limitations on collecting defaulted federal student loan debt, meaning it can be pursued indefinitely.

Private student loans, issued by banks or other financial institutions, are subject to state contract law and consumer protection laws. This typically requires them to file a lawsuit against the borrower. While both federal and private loans can damage credit scores upon default, the paths to recovery and the types of available relief differ.

Federal student loans offer specific paths to discharge, such as Total and Permanent Disability (TPD) discharge or discharge upon the death of the borrower. While extremely difficult, both federal and private student loans can be discharged in bankruptcy under specific circumstances, requiring borrowers to prove “undue hardship” in a separate adversary proceeding. However, many private loans for educational purposes may be dischargeable in a normal bankruptcy proceeding, similar to other consumer debts, if they do not meet the strict definition of a “qualified education loan” under bankruptcy law. Federal loans, particularly Direct Loans and Direct Consolidation Loans, have seen streamlined processes for bankruptcy discharge under recent guidance, though the undue hardship standard remains.

Formal Programs for Resolving Default

Borrowers with defaulted federal student loans have formal programs available to resolve their default status and regain good standing. One option is loan rehabilitation, which requires nine voluntary, reasonable, and affordable monthly payments within 10 consecutive months. Payments are calculated as 15% of discretionary income, or a lower amount can be requested. Upon successful rehabilitation, the default status is removed from the credit report, and eligibility for federal student aid is restored. A federal student loan can only be rehabilitated once.

Another path to exit default for federal loans is through loan consolidation. Borrowers can consolidate defaulted federal loans into a new Direct Consolidation Loan. To qualify for consolidation while in default, a borrower must either agree to repay the new consolidated loan under an Income-Driven Repayment (IDR) plan or make three full, on-time, consecutive monthly payments on the defaulted loan. Consolidation can be a faster way to exit default compared to rehabilitation, but it does not remove the default notation from the credit report.

Income-Driven Repayment (IDR) plans are key for federal loan repayment and default resolution. These plans adjust monthly payments based on a borrower’s income and family size. To apply for an IDR plan, borrowers can complete an online application through the Federal Student Aid website or submit a paper form to their loan servicer. The application requires personal information and income documentation, such as tax returns, W2s, or pay stubs. Entering an IDR plan can prevent default or be a condition for rehabilitation or consolidation.

Settlement options may also be available for both federal and private defaulted student loans. For federal loans, settlement involves negotiating with the Department of Education to pay a lump sum less than the full amount owed, often requiring the loan to be in default. Federal settlement offers are limited to specific formulas, such as paying 100% of the principal plus 50% of accrued interest, or 90% of the current balance. These settlements rarely involve significant discounts due to the government’s strong collection powers. Private lenders may offer more flexible settlement terms, accepting 40% to 60% of the outstanding balance, especially once the loan is in default or “written off.” Any agreement should be obtained in writing.