What Happens If You Ignore Student Loans?
Learn the real-world financial and long-term consequences of failing to manage your student loan debt.
Student loans represent a significant financial obligation for many individuals in the United States. Unlike other forms of debt, student loans, particularly federal ones, possess unique collection mechanisms that can lead to severe repercussions if left unaddressed. Understanding the potential outcomes of failing to manage these debts is essential for borrowers.
Initial Repercussions of Missed Payments
A loan becomes delinquent the first day after a scheduled payment is not made. If payments remain unmade, this delinquency progresses, and after 90 days, loan servicers typically report the missed payments to national credit bureaus. This reporting can significantly harm a borrower’s credit score.
Beyond the damage to credit, missed payments also incur financial penalties. Late fees are often assessed, and interest continues to accrue, increasing the overall loan balance. As delinquency continues, loan servicers and collection agencies will initiate communication, attempting to contact the borrower to resolve the outstanding amount. These efforts aim to prompt payment before the loan escalates to a default status.
Consequences of Loan Default
A student loan officially enters default after an extended period of non-payment. For most federal student loans, this occurs when payments are 270 days past due, while many private student loans can default after just 90 to 120 days of missed payments. Once a loan is in default, the entire outstanding balance, including accrued interest, typically becomes immediately due, a process known as acceleration.
The government can then employ aggressive collection methods for federal student loans without a court order, including wage garnishment where up to 15% of a borrower’s disposable pay can be withheld by their employer and sent directly to the loan holder. Additionally, federal and state tax refunds can be seized through the Treasury Offset Program. A portion of Social Security benefits, up to 15%, can also be withheld, though a minimum amount of benefits is protected from offset. For private student loans, lenders usually must obtain a court order to pursue wage garnishment, which can be up to 25% of disposable income, or to pursue other actions like bank account levies or asset seizure.
Wider Long-Term Impacts
Defaulting on federal student loans results in the loss of eligibility for future federal student aid, including grants and new loans. This can impede a borrower’s ability to pursue further education or training. While there are pathways to regain eligibility, such as loan rehabilitation or making satisfactory repayment arrangements, the default status must be addressed.
A damaged credit history due to delinquency and default makes it significantly more challenging to obtain other forms of credit. Securing mortgages, car loans, or even credit cards becomes difficult, often resulting in higher interest rates or outright denial. In some professions, particularly those requiring state licenses such as teaching or healthcare, student loan default can lead to the suspension or denial of professional licenses. While states are increasingly repealing these laws, it remains a risk in many jurisdictions.
For co-signers, a borrower’s default means they become fully responsible for the debt. The default will negatively impact the co-signer’s credit report, and they may face collection efforts, including lawsuits, wage garnishment, or tax refund offsets. Discharging student loans through bankruptcy is exceptionally rare. Borrowers must prove “undue hardship,” a difficult legal standard that typically requires demonstrating an inability to maintain a minimal standard of living, a financial situation unlikely to improve, and good faith efforts to repay the loan.