What Happens When You Don’t Pay Student Loans?

Student loans are a common financial tool designed to help individuals finance higher education expenses, including tuition, books, supplies, and living costs while pursuing a degree. These funds are typically borrowed from either the federal government or private lenders, such as banks or credit unions. While federal loans often come with specific borrower benefits, private loans are offered by financial institutions and may have different terms. Understanding the potential consequences of not meeting repayment obligations is important for any borrower, as failure to pay can lead to significant financial and legal ramifications.

Initial Consequences of Non-Payment

When a student loan payment is missed, the loan immediately becomes delinquent, marking the first stage of non-payment. This delinquency continues until the overdue amount is paid or other arrangements are made with the loan servicer. If a federal student loan payment remains unpaid for 90 days or more, this delinquency is reported to national credit bureaus, which can negatively impact a borrower’s credit rating. Private lenders may report missed payments to credit bureaus even sooner, sometimes after just 30 days.

Continued delinquency can lead to a loan entering default, a more severe status with broader implications. For most federal student loans, default occurs if payments have not been made for more than 270 days. Private student loans can enter default faster, with some agreements specifying default after 90 days of missed payments. The specific terms for private loan default are outlined in the individual loan agreement.

A negative impact on a borrower’s credit score is a consequence of both delinquency and default. A damaged credit score can make it difficult to obtain future credit cards, car loans, or mortgages, and may result in higher interest rates. A poor credit score can also affect a borrower’s ability to secure housing, obtain certain types of employment, or sign up for utilities.

Federal Student Loan Enforcement Actions

Once a federal student loan enters default, the entire unpaid balance, including accrued interest, can become immediately due, a process known as acceleration. The federal government has several mechanisms to collect on defaulted loans. One is administrative wage garnishment, which allows a portion of a borrower’s disposable income to be withheld directly from their paycheck without a court order. The maximum amount that can be garnished is 15% of the borrower’s disposable pay.

Another action is the tax refund offset, where federal and potentially state tax refunds can be intercepted and applied towards the outstanding defaulted loan balance. Similarly, a portion of Social Security benefits, whether retirement or disability, can also be withheld and applied to the defaulted loan through an offset.

Beyond these direct collection methods, collection costs are added to the outstanding loan balance once a federal loan defaults. These additional charges can increase the total amount owed. Borrowers in default also lose eligibility for future federal student aid, meaning they cannot receive additional federal loans or grants.

A defaulted federal loan removes access to many borrower protections and repayment options. Borrowers lose eligibility for deferment, forbearance, and income-driven repayment plans, which help manage payments during financial hardship. These options become unavailable once the loan status changes to default, limiting flexibility in managing debt.

Private Student Loan Enforcement Actions

Private student loans do not carry the same government-backed collection powers as federal loans, but lenders still have enforcement actions available when a loan defaults. As with federal loans, private loan defaults are reported to credit bureaus, damaging the borrower’s credit score. This negative mark can impact financial opportunities for a prolonged period.

Private lenders sell or assign defaulted loans to third-party collection agencies. These agencies will engage in communication with the borrower, attempting to negotiate repayment plans or settlements. They may also impose additional collection fees, increasing the total amount owed.

Private lenders can file a lawsuit against the borrower to obtain a court judgment. If the lender wins, this judgment provides legal avenues to enforce collection. These can include bank account levies or placing liens on property, which can complicate selling or refinancing assets.

A court order obtained through a lawsuit can also lead to wage garnishment for private student loans. Unlike administrative wage garnishment for federal loans, private lenders must secure a judgment before they can garnish wages. The liability of cosigners is also important for private student loans. If a loan has a cosigner, that individual is equally responsible for the debt and faces the same consequences, including credit score damage and potential legal action, if the primary borrower defaults.

Pathways to Resolving Default

For federal student loans in default, two pathways exist to resolve the default status: loan rehabilitation and loan consolidation. Federal loan rehabilitation involves the borrower making a series of voluntary, on-time payments, nine payments within ten consecutive months. Successfully completing rehabilitation removes the default notation from the borrower’s credit report and restores eligibility for federal student aid and other benefits.

Alternatively, borrowers can pursue federal loan consolidation, where defaulted federal loans are combined into a new Direct Consolidation Loan. To qualify, a borrower needs to make three consecutive, on-time payments on the defaulted loan or agree to repay the new consolidated loan under an income-driven repayment plan. Consolidation ends the default status, provides a new interest rate, and restores eligibility for federal aid and flexible repayment options.

For both federal and private loans, settlement is another resolution option. Lenders, or the collection agencies holding the debt, may be willing to accept a lump sum payment that is less than the full amount owed. This can be a viable option for borrowers who can access a sum of money, but it often requires negotiation.

Resolving defaulted private student loans involves direct negotiation with the lender or the collection agency. Borrowers can attempt to work out a repayment plan or negotiate a settlement for a reduced amount. While private lenders are not obligated to offer the same flexible repayment options as federal loans, they may be open to arrangements to avoid legal action. Bankruptcy is a legal option for discharging student loan debt, but it is exceptionally difficult to achieve, as borrowers must prove undue hardship, a very high legal standard that few meet.