Student loans are one of the most significant financial burdens that many young Americans face. But what happens if you don’t pay student loans?
Making these payments on top of other financial responsibilities can be challenging. As a result, more than 1 million student loan borrowers go into default every year.
Furthermore, a study by the Federal Reserve found nearly one in five student loan recipients were at least 90 days behind on payments.
Unfortunately, there can be many negative consequences of failing to make your student loan payments, including wage garnishment, a drop in your credit score or a suspension of your professional license.
Luckily, there are steps you can take to prevent this — so act early if you’re struggling to make your loan payments.
What Happens If You Don’t Pay Student Loans?
Failing to make payments on your federal or private student debt can have serious negative impacts on your overall financial picture.
The first day after a missed loan payment, your loan becomes delinquent, and it stays that way until your payments are up to date. Each missed payment might also result in a late fee.
Delinquent federal student loans aren’t reported to the credit bureaus until they are more than 90 days past due. You have a chance to catch up before it negatively impacts your credit. But in the case of private loans, your lender may report it to the credit bureaus as early as 30 days past due.
Having late payments on your credit report can negatively impact your credit score and make it more difficult to open credit cards, borrow money or even get an apartment.
In the event that you can get a loan, you’re likely to pay higher interest rates.
The longer your loans are past due, the worse the ramifications become. After your direct federal loans are more than 270 days past due, they enter default.
This process happens much quicker for other loans. Private student loans enter default after 120 days, and Federal Perkins loans can enter default immediately after a missed payment.
Once you enter default, you may face a myriad of consequences.
Your credit will take a much larger hit than it would for just a late payment. You may also face wage garnishment or other legal action.
Note: Federal student loan payments are currently suspended due to emergency action by the federal government in response to the COVID-19 pandemic. Eligible loans are placed in automated forbearance with a temporary 0% interest rate until September 30, 2021. There are no monthly payments required and no ramifications if you don’t make payments during this time.
Can You Get Rid Of Your Student Loans?
Usually, the only way to get rid of student loans is to pay them.
Federal student loans aren’t like other debts that have a statute of limitations and eventually fall off your credit report if you don’t pay them. Federal student loans have no statute of limitations, meaning the government can try to collect their money for as long as they want.
Unlike other debts, student loans are rarely discharged during bankruptcy (though there are some notable exceptions).
One clear path to getting rid of federal student loans without fully paying them off is to become eligible for student loan forgiveness or discharge.
Types of forgiveness and discharge include:
- Public Service Loan Forgiveness: Available to borrowers employed by a government or nonprofit organization who make at least 120 on-time payments while working for a qualifying employer.
- Teacher Loan Forgiveness: Available for up to $17,500 of forgiveness to teachers who work in a low-income school for five years.
- Closed School Discharge: Available to borrowers whose school closes while they are enrolled or soon afterward.
- Total and Permanent Disability Discharge: Available to borrowers who are permanently disabled.
Keep in mind that forgiveness programs often require you to make on-time payments for a specific number of years. These programs won’t get you out of making at least some payments.
It’s important to note that private student loans work a bit differently. Private student loans do not qualify for forgiveness programs.
The statute of limitations for private student loans is decided at the state level, meaning you may reach the point where your lender can no longer take legal action to recover the loan amount. However, the debt may be sent to a debt collection company.
Keep in mind that the loan will stay on your credit report for seven years from the first delinquency date, which may create problems in other areas of your life.
Consequences of Defaulting on Your Student Loans
Here are some examples of what could happen if you don’t pay your student loans.
1. Late fees
If you’re 30 days late on federal student loans, you’ll typically encounter a late fee of up to 6% of the amount that was due and unpaid. So if you owed a late payment of $350, you might have to pay up to $21 extra on top of your existing student loan payment.
Private student loans have similar late fees but aren’t standardized. In this scenario, you’ll either pay a predetermined percentage or a flat fee, whichever is higher.
2. Lower credit score
After a certain number of days, a lender can report the issue to credit bureaus, which can adversely affect your credit score.
This can impact your life in several ways, including making it more difficult to qualify for credit cards, buy a car and get a mortgage.
If you’re approved with bad credit, you’re likely to experience higher interest rates.
Loan services will report your late payments to credit bureaus when you’re 30 days past due for private student loans and 90 days past due for federal student loans.
3. Lose loan benefits
You’re no longer eligible for deferments or forbearances once you default on your federal student loans.
You’ll also no longer be able to choose your repayment plan and may have to shift to an income-driven repayment plan instead.
In turn, this limits your repayment flexibility moving forward.
4. Wage garnishment
With wage garnishment, a lender can withhold up to 15% of each paycheck to collect on your federal student loan without taking you to court. In the case of private student loans, garnishments may equal up to 25% of your wage. They can continue to do so until your student loan has been paid in full or you remove it from default.
Note: Collection agencies are currently prohibited from wage garnishing due to the COVID-19 student loan relief effort. This is in effect through at least September 30, 2021.
5. Negatively impact credit
We already mentioned that late payments can hurt your credit score. But going into default only worsens the issue and can send your credit score plummeting even further.
Even if you had good credit beforehand, it can bring you down into the “poor” range.
6. Withhold your tax refund
In some cases of federal student loan default, the government may take your tax refund.
Some states also have laws in place where state guaranty agencies are allowed to take your state income tax refunds as well.
This can be a considerable financial blow if you depend heavily on your tax refund.
Note: Collection agencies are currently prohibited from wihtholding a borrower’s tax refund due to the COVID-19 student loan relief effort. This is in effect through at least September 30, 2021.
7. Cosigner becomes involved
A cosigner is equally responsible for the repayment of a student loan.
If you default, the lender will turn to your cosigner, and they’ll have to begin making payments.
It can also negatively impact the cosigner’s credit, and they may find it more difficult to qualify for future loans or refinance existing ones.
Cosigners are quite common in the case of private student loans. But, a cosigner might not realize what could happen if you don’t pay your student loans.
8. Social Security payments garnished
Defaulting can adversely affect your retirement plan, at least for federal student loans.
Known as Social Security garnishment, the government can take up to 15% of your Social Security benefit. While this doesn’t apply to private student loans, this is something you should definitely be aware of for federal student loans.
Note: Collection agencies are currently prohibited from garnishing Social Security benefits due to the COVID-19 student loan relief effort. This is in effect through at least September 30, 2021.
9. Lien on a property
There are situations where the government will sue for defaulting on a federal student loan.
“In almost every case, the borrower loses,” explains CNBC reporter Abigail Hess. “If the government wins, they can place a lien on your home and even force a sale.”
Whenever a lien is placed on your property, you’re not legally allowed to sell, refinance or transfer ownership. To clear up the title, you must first pay off the lien.
10. Lose eligibility for additional financial aid
You won’t be eligible for further federal student aid once you go into default on a federal student loan.
This often means your educational pursuits will be put on hold, and you must get out of default to receive aid again.
11. Suspend Your professional license
While this won’t apply to everyone, some states may even revoke your professional license if you default on your student loans..
Nurses, teachers, therapists, and electricians are just a few examples of careers that require a professional license.
This situation creates a Catch-22 where you’re unable to work, which further increases the difficulty of repaying.
12. Suspend your driver’s license
While state laws change annually, some states have been known to suspend your driver’s license in the past if you default.
Needless to say, this makes it more difficult to get to and from work, which creates further issues earning a paycheck to repay student loans.
13. Loans go to collections
Another potential consequence of defaulting on a private student loan that the lender may send your debt to a collection agency.
The agency will charge additional fees when trying to recoup the money. They usually add up to 25% more than what you owed initially on your principal, which only compounds the problem and puts you deeper in debt.
14. You could be arrested
You won’t go to jail for not repaying your student loans. But you may end up facing a lawsuit for unpaid debt.
If you fail to show up for your court date, this can result in an arrest.
While the concept of “debtors’ prisons” is illegal and no longer exists, some people do end up under arrest if they fail to follow a court order.
What to Do If You Can’t Make Your Student Loan Payments
There may come a time in your life where you struggle to make your student loan payment due to insufficient income, job loss, or another financial emergency. It’s important to understand what happens if you can’t pay your student loans because of something like this.
While this can be overwhelming, there are steps you can take to lessen the blow.
What to do if you can’t pay your federal student loans
If you can’t make your federal student loan payments during the COVID-19 outbreak, you’re in luck. The federal government has suspended payments and interest on all federal student loans through September 30, 2021. You are not required to make payments during this time.
If you still can’t make your payments once the suspension of loan payments has ended, you still have a number of options.
One of the benefits of having federal student loans is that they have plenty of options available to make it easier to pay your loan or pause payments altogether in some situations.
The first thing you might consider is changing your repayment plan.
The federal government allows borrowers to change their repayment plan at any time for free, so you can switch to one that better fits your situation.
The standard repayment plan requires borrowers to pay off their loans in 10 years. But someone with more than $30,000 of debt is eligible for an extended repayment, which gives you an extra 15 years to pay off your loans.
The variety of income-based repayment plans guarantee that your monthly payments don’t exceed a certain percentage of your income.
If you can’t make your payments at all, a new repayment plan likely isn’t going to be enough.
In that case, you might consider either deferment or forbearance of your loan to temporarily suspend payments.
Deferment allows you to postpone loan payments and pauses interest accrual on subsidized student loans.
At the end of the deferment period, interest will be capitalized (meaning added to the principal balance to also accrue interest).
Forbearance is a similar concept, except that interest will accrue the entire time.
For both programs, you may need to provide your loan servicer with proof of your financial hardship. Make sure to take this step as soon as you know you can’t make your payments because you can’t enter deferment or forbearance once you go into default on your loans.
What happens if you can’t pay your private student loans
Private student loans can be a bit trickier than federal ones.
These loans don’t often come with flexible repayment plans. Most often, your lender simply puts you on a repayment plan that will have the loan fully paid off on their desired timeline.
If you can’t pay, your first step should be to call your lender and ask if they have any special repayment programs. For example, SoFi offers an Unemployment Protection Program, which allows for a 12-month forbearance if you lose your job through no fault of your own. Sallie Mae offers forbearance for borrowers facing temporary financial hardship, also for up to 12 months.
Another option for making your payments more affordable is to refinance your private student loan.
By doing so, you may be able to reduce your interest rate, extend the life of your loan, or both for purposes of lowering your monthly payment and catching up on overdue payments.
What to Do If Your Student Loans Go Into Default
When your loans go into default depends on the type of loan you have.
For federal student loans, you typically enter default when your loans are 270 days past due, though your loans can go into default immediately for a Federal Perkins loan.
In the case of private student loans, you generally enter default when your loans are 120 days past due.
You can find out if your loans are in default by checking your online account or by checking your credit report, which will contain any defaults.
Once you go into default, there’s a lot of damage already done. Your credit score has likely taken a huge hit, you’ve incurred late fees, and you may have had legal action taken against you, such as garnished wages.
But it’s not too late to try to rectify the situation and get your finances back on track.
Make sure the default is correct
The very first thing to do is make sure your lender didn’t put your loans into default by mistake.
You’ll likely know whether you’ve been missing your student loan payments. If you know you’re on-time with your payments or aren’t past-due enough for default, reach out to your loan servicer to fix the mistake.
Make a plan to get out of default
If the default isn’t a mistake, it’s time to try to fix it.
For federal loans, you’ve got a few different options:
- Repayment: When your loans go into default, the entire balance becomes due immediately. Most borrowers won’t be able to pay the full amount. But on the off-chance you can, it’s the fastest way out of default.
- Rehabilitation: This option allows you to come to an agreement with your lender on a new repayment plan. You’ll have to make at least nine payments within 10 months, and then the default can come off your loan and your credit report (though the late payments will stay). If you rehabilitate your loan, you once again have other repayment options available to you, such as income-based plans, deferment, and forbearance.
- Consolidation: The final option is to consolidate your federal loan into a Direct Consolidation Loan. The new loan pays off your defaulted loans, and you’ll begin payment on it under an income-based repayment plan.
Keep in mind that options may look a bit different for private student loans. While you aren’t likely to have rehabilitation available to you, you can try to work with your lender to create a new repayment plan or negotiate to settle the debt.
42 million Americans have student loan debt, and before the COVID-19 outbreak, only about half of those were in repayment. The rest were in forbearance, deferment, or default.
Thanks to emergency relief measures, the government suspended federal student loan payments through September 30, 2021. But if you don’t make your payments after that, there may be ramifications.
As the number of people who can’t make their student loan payments increases, it’s more important than ever that borrowers understand what happens if they don’t pay their student loans.
It’s not a problem that goes away.
On the contrary, federal student loans have no statute of limitations and they aren’t discharged during bankruptcy. Your lender will likely find a way to get their money, one way or another.
The good news is that there are options available to those struggling to make their student loan payments.
Tools like forbearance and income-based repayment plans can help lower or eliminate your payment temporarily.
To find the next steps, speak to your student loan servicer or a financial professional to learn what happens if you don’t pay your student loans, and how you can get on the right track.