What Happens If You Stop Paying Student Loans?

Failing to meet student loan repayment obligations can lead to serious repercussions. The impact can vary greatly depending on whether the loans are federal or private, and understanding these distinctions can help borrowers navigate challenging financial situations.

Understanding Loan Status Changes

Missing a student loan payment changes the loan’s status, leading to default. The initial stage is delinquency, which begins the day after a scheduled payment is due and not received. For federal student loans, delinquency is typically reported to the three major credit bureaus after 90 days of non-payment. Private student loans often have a shorter reporting period, sometimes 30 days.

Delinquency progresses to default if payments remain unpaid. For most federal student loans, default occurs after 270 days of continuous non-payment. Private student loans enter default sooner, often after 90 to 120 days of missed payments, though this timeline can vary based on the specific lender’s terms. Default signifies a more severe status, triggering distinct consequences for the borrower.

Federal Student Loan Default Outcomes

Defaulting on federal student loans means the entire unpaid balance, plus accrued interest, can become immediately due through acceleration. This accelerated balance is then subject to various federal government collection actions.

One action is wage garnishment, where a portion of a borrower’s disposable income is withheld from their paycheck without a court order. The maximum amount garnished is 15% of disposable pay. The federal government can also intercept federal and state tax refunds through the Treasury Offset Program, applying these funds directly to the defaulted loan balance.

Social Security benefits, including retirement and disability payments, can also be offset to repay defaulted federal student loans. Up to 15% of these benefits can be withheld, though a protection ensures the remaining monthly benefit does not fall below $750. Defaulting on federal loans also leads to a loss of eligibility for future federal student aid, including grants, loans, and work-study programs. Collection costs are added to the outstanding loan balance.

Private Student Loan Default Outcomes

The consequences of defaulting on private student loans differ from federal loans due to the absence of the same administrative collection powers. Private lenders must pursue legal action to recover the debt, often initiating lawsuits to obtain a court judgment.

Once a court judgment is secured, private lenders can pursue actions such as wage garnishment, bank account levies, or placing liens on property, depending on state laws. The maximum amount garnished from wages for private student loans is 25% of disposable income, differing from federal loan limits. Private lenders commonly sell or assign defaulted loans to third-party collection agencies.

A significant aspect of private student loan default involves cosigner liability. If a loan has a cosigner, that individual becomes fully responsible for the entire debt upon the borrower’s default. This means the cosigner can face the same collection efforts, including lawsuits and asset seizure, as the primary borrower. Unlike federal loans, private loans do not have standardized forgiveness or rehabilitation programs.

Credit Impact and Resolution Pathways

Both federal and private student loan delinquencies and defaults are reported to national credit bureaus, damaging a borrower’s credit score. This negative information can remain on a credit report for up to seven years from the date of initial delinquency or default, making it difficult to obtain future credit, housing, or certain types of employment.

For federal student loans, borrowers have established pathways to resolve default. Loan rehabilitation involves making nine voluntary, reasonable, and affordable monthly payments within a 10-month period. Successfully completing rehabilitation removes the default status from the borrower’s credit report, though past delinquencies remain.

Another option is loan consolidation, combining defaulted federal loans into a new Direct Consolidation Loan. To qualify, borrowers must agree to repay the new loan under an income-driven repayment plan or make three consecutive, on-time payments on the defaulted loan before consolidation. While consolidation brings the loan out of default and stops collection activities, it does not remove the default entry from the credit report. Income-driven repayment plans, which adjust monthly payments based on income and family size, are also available.

Resolution options for private student loans are more limited and less standardized. Borrowers engage in direct negotiation with the lender or collection agency. This may lead to repayment plans, temporary forbearance, loan modifications, or debt settlements, where the lender agrees to accept a lower amount than the total owed. Formal rehabilitation programs, like those for federal loans, are not available for private student loans.