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

Student loans are a significant financial obligation. Understanding the potential outcomes of not fulfilling these commitments is important for financial well-being. This article explains the progression of consequences, from initial missed payments to formal loan default, and outlines the distinct impacts on federal and private student loans.

Initial Repercussions of Missed Payments

When a student loan payment is missed, the loan becomes delinquent. Lenders and loan servicers typically apply late fees once a payment is about 15 days past due. These fees usually range from 5% to 6% of the unpaid portion. Accruing interest continues to add to the principal balance, increasing the total amount owed.

After a payment is missed, the loan servicer will begin outreach through letters, emails, and phone calls. Even a single missed payment can negatively affect a borrower’s credit score, as servicers typically report delinquent accounts to major credit bureaus once they are 30 days past due.

Federal Student Loan Default

Federal student loans enter default after a prolonged period of non-payment, typically 270 days (approximately nine months) of delinquency. Once a federal loan defaults, borrowers lose access to many flexible repayment options and protections.

Upon default, the entire unpaid balance, including accrued interest, may become immediately due. Borrowers also lose eligibility for future federal student aid, meaning they cannot receive grants, work-study funds, or new federal loans. Access to deferment, forbearance, and income-driven repayment plans is also revoked.

The Department of Education or its assigned collection agency can pursue various administrative actions to recover the debt without a court order. This includes administrative wage garnishment, allowing the government to seize up to 15% of a borrower’s disposable pay. Another consequence is the Treasury Offset Program (TOP), which intercepts federal tax refunds, state tax refunds, and some federal payments like Social Security benefits (excluding a protected minimum amount) to apply toward the defaulted loan balance.

Collection costs can also be added to the outstanding balance, often up to 25% of the principal and interest. While less common, the government can initiate a lawsuit to obtain a court judgment, allowing for further collection measures. The default status remains on a borrower’s credit report for seven years from the date of default, hindering access to new credit, housing, and employment opportunities.

Private Student Loan Default

Private student loans operate under different rules than federal loans; default definition is determined by the specific loan agreement. While federal loans typically default after 270 days, private loans can default much sooner, sometimes after just one missed payment or a shorter period like 90 to 120 days.

When a private loan defaults, the lender will intensify collection efforts, including frequent calls, letters, and potentially assigning the debt to a third-party collection agency. Unlike federal loans, private lenders generally cannot garnish wages or seize tax refunds without first obtaining a court judgment. Therefore, lawsuits are a common method for private lenders to enforce collection.

If a lender successfully sues a borrower and obtains a court judgment, they can pursue actions such as wage garnishment or bank account levies. The negative impact on a borrower’s credit report is severe, with the default status reported to credit bureaus, damaging their credit score and making it difficult to secure future loans, credit cards, or housing. This negative mark can remain on the credit report for up to seven years.

If a loan has a cosigner, that individual is equally responsible for the debt, and their credit will be negatively affected. The lender can pursue the cosigner for the full amount owed, and they face the same collection actions and potential lawsuits as the primary borrower. If a lawsuit is filed, the borrower may be responsible for the lender’s attorney fees and court costs, substantially increasing the total amount owed.

Paths to Resolving Default

While defaulting on student loans carries serious consequences, several avenues exist for borrowers to bring their loans back into good standing. For federal student loans, two primary programs are available: loan rehabilitation and loan consolidation. These options can remove the default status and restore eligibility for federal student aid and flexible repayment plans.

Loan rehabilitation involves making a series of on-time, voluntary monthly payments over a specific period, typically nine payments within 10 consecutive months, based on an affordable amount determined by the Department of Education. Successfully completing rehabilitation removes the default from the borrower’s credit report, though the record of late payments remains. This option is generally a one-time opportunity for federal loans.

Alternatively, borrowers can resolve a federal loan default through a Direct Consolidation Loan. This involves taking out a new federal loan to pay off the defaulted loan(s), effectively moving them out of default. To consolidate a defaulted loan, borrowers must either agree to repay the new consolidation loan under an income-driven repayment plan or make three consecutive, voluntary, on-time monthly payments on the defaulted loan before consolidation. Consolidation makes the borrower immediately eligible for federal student aid and all federal repayment plans.

For both federal and private loans, settlement is another option, where the borrower negotiates with the lender or collection agency to pay a lump sum less than the full amount owed. While this can provide significant relief, the forgiven portion might be considered taxable income by the IRS.

Bankruptcy is rarely a viable option for student loans, as borrowers must prove “undue hardship” through a strict legal test, which is challenging to meet. For private loans, resolution options are more limited and primarily involve direct negotiation with the lender for a modified repayment plan or settlement, or addressing the issue through the court system if a lawsuit has been filed.