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

Non-payment of student loans can lead to a range of outcomes with serious financial implications. Ignoring student loan debt does not make it disappear; instead, it can escalate into a complex situation affecting a borrower’s financial standing for years. Falling behind on payments initiates a series of events with increasing consequences, highlighting the need for proactive engagement with loan servicers.

The Stages of Non-Payment

Student loans progress through distinct stages if payments are not made. The initial stage is delinquency, beginning the first day after a payment is missed. Your loan account remains delinquent until the overdue amount is paid or arrangements are made with your loan servicer, such as changing repayment plans or obtaining a deferment or forbearance. If a federal student loan payment becomes 90 days or more past due, the delinquency is reported to the three major national credit bureaus, negatively affecting your credit rating.

If delinquency continues, the loan will eventually enter default. For most federal student loans, default occurs after 270 days of missed payments. For Federal Perkins Loans, default can be declared by the loan holder as soon as a payment is missed or another term of the promissory note is violated. Once a loan enters default, the entire unpaid balance, including any accrued interest, may become immediately due, a concept known as acceleration.

Financial Consequences of Default

Defaulting on student loans carries several financial impacts. One consequence is damage to your credit score. Delinquent payments reported to credit bureaus, and subsequently the default status, can severely lower your credit rating, making it more difficult to obtain future credit like car loans, mortgages, or credit cards. This negative mark can remain on your credit report for up to seven years.

Beyond credit score damage, borrowers in default lose access to federal student aid benefits. This includes losing eligibility for additional federal student aid, preventing enrollment in federal aid programs for future education. Borrowers also forfeit options such as deferment, forbearance, and income-driven repayment plans, which provide flexibility during financial hardship.

The total amount owed on the loan can also increase. When a loan enters default, collection costs are added to the outstanding balance. These costs can range up to 25% of the outstanding principal and interest balance for certain federal loans, or a percentage deducted from each payment, such as 20% of each payment. These added fees increase the overall debt, making it more challenging to repay.

Collection Actions

Once a federal student loan enters default, the government can recover the debt without a court order. One common method is wage garnishment, where a portion of a borrower’s earnings is directly withheld from their paychecks. For federal student loans, the government can garnish up to 15% of a borrower’s disposable pay, which is their income after legally required deductions like taxes. This action, known as Administrative Wage Garnishment (AWG), does not require a court judgment. Borrowers receive a 30-day notice before AWG begins, providing an opportunity to request a hearing to dispute the garnishment or arrange repayment.

Another method for debt recovery is the tax refund offset, where federal and state income tax refunds can be seized to repay the defaulted loan. This process is managed through the Treasury Offset Program. A portion of Social Security benefits, including retirement or disability payments, can also be withheld to satisfy the debt. The federal government can offset up to 15% of Social Security benefits. These offsets can occur without a court order, similar to AWG.

While federal loans have administrative collection powers, private student loan lenders must pursue legal action to garnish wages or seize assets. This means they need to sue the borrower and obtain a court order or judgment before they can compel repayment. If a judgment is obtained, private lenders may garnish wages, often up to 25% of disposable income, depending on state laws. Legal action can lead to court judgments allowing for bank account levies or the seizure of other assets. Collection agencies are involved in pursuing defaulted debts, working on behalf of the loan holder to recover outstanding amounts.

Resolving Default Status

Borrowers with federal student loans have pathways to resolve a default status and bring their loans back into good standing. One option is loan rehabilitation, which involves making a series of on-time, affordable monthly payments. A borrower must make nine consecutive, voluntary, and reasonable payments within a 10-month period as determined by the loan holder. After successfully completing rehabilitation, the record of default is removed from the borrower’s credit history, though late payments prior to default remain. This is a one-time opportunity for each defaulted loan.

Another method is loan consolidation, where a new Direct Consolidation Loan pays off one or more defaulted federal loans. To consolidate a defaulted loan, a borrower needs to either agree to repay the new consolidation loan under an income-driven repayment plan or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidation. Consolidation can stop collection activities like wage garnishment and tax refund offsets. However, unlike rehabilitation, consolidation does not remove the default record from the borrower’s credit history.

Full repayment is another way to resolve default. Paying the entire outstanding balance, including any accumulated interest and collection costs, will immediately bring the loan out of default. Borrowers should engage directly with their loan servicers or the Default Resolution Group to understand their options and requirements.