May 27, 2021

What Happens If You Don’t Pay Student Loans?

According to EducationData, approximately 43.2 million Americans owe a combined $1.71 trillion in student loan debt. The numbers are staggering, and many Americans find it challenging to make monthly payments on top of their other financial responsibilities. In fact, more than 1 million student loan borrowers default every year.

So, what happens if you don’t pay student loans? Here are some of the possible consequences and scenarios:

1. Delinquent Loan

When you fail to pay your loan 90 days after the due date, it gets tagged as delinquent. This is reported to the three major credit bureaus, which means that your credit rating will take a hit. If you have a private loan, the lender may report it to the credit bureaus as early as when you’re 30 days overdue. You may also be charged with late fees and penalties.

The status will stay this way until you can get your payments up-to-date. When your credit report shows that you have missed or late payments, it’ll have a negative effect on your finances and ability to borrow money from major financial institutions.

2. “In Default” Account

If you still fail to make payments 270 days past the due date, your loan will be officially considered as “in default.” For private loans, the account enters default 120 days past due.

The lender will do its best to get you to pay. If they send the loan to a debt collection agency, you may also be on the hook for the fees used to cover the cost of collection.

3. Long-Term Consequences of Default

Defaulting on your student loan has far-reaching consequences. Here are some of them:

  • Late fees: If you have a federal student loan, you’ll most likely be charged with late fees amounting to at most 6% of the amount that is due and unpaid. Private loans also come with late fees, but they vary depending on the specific lender.
  • Lower Credit Score: A lower credit score will make it more difficult for you to obtain credit cards and other types of loans in the future. Even if you do manage to get approved for these loans, you’ll most likely be charged higher interest rates.
  • Loss of Benefits: Federal student loans come with certain benefits including eligibility for forbearance or deferment. Once you default, you’ll lose access to these benefits. You may also have to shift to an income-driven repayment plan instead of being able to choose a repayment plan that works for your specific needs.
  • Wage Garnishment: Federal student loan lenders can garnish your wage to collect on your unpaid balance. This can reach up to 15% of your paycheck. Private lenders may also garnish up to 25% of your wages.
  • Withholding Tax Refunds: In certain cases, the government may withhold tax refunds to collect on your student loan payments.
  • Legal Action: Sometimes, the lender may go as far as suing you to collect the money that they’re owed. Private lenders are, in fact, notorious for aggressively pursuing defaulting borrowers in court.
  • Property Lien: If the government sues you in court and wins, they can place a lien on your property. A lien is essentially an encumbrance preventing you from selling or transferring ownership of the property until you can pay it off. The government can also force a sale.
  • Suspension of Driver’s and Professional License: In some states, borrowers who default on their student loans can get their driver’s and professional (e.g. nursing, teaching, electrician’s) license suspended or revoked. This creates a difficult scenario where you can’t work or travel to work, so you can’t get the money you need to pay for your debt.
  • Effects on Cosigners: If your loan has a cosigner, the lender may turn to them to collect on your debt. Defaulting will also have a negative effect on your cosigner’s credit score and finances.

Student Loan Forgiveness or Discharge

Student loans rarely ever go away. Unlike other forms of debt, student loans are rarely discharged by filing for bankruptcy. You’ll also still be required to fulfill your obligation if you fail to graduate or can’t find employment opportunities in your field.

However, there are other options to get rid of student loans without paying them off fully:

  • Teacher Loan Forgiveness: Teachers who work in low-income schools for at least five years are eligible for up to $17,500 of forgiveness.
  • Public Service Loan Forgiveness: Borrowers who are working in government offices or non-profit organizations and have made at least 120 prompt payments may qualify for forgiveness.
  • Total and Permanent Disability Discharge: This is available to borrowers who are suffering from a permanent disability.
  • Closed School Discharge: This is available to borrowers whose schools have closed while they were still enrolled or immediately after they graduate.

Takeaway

It’s important to find ways to make repayment more manageable. You can try looking into forbearance or deferment programs that will provide temporary relief while you're financially struggling. There are also refinancing and loan consolidation options that can reduce the amount of your monthly payments.

It’s important to research and consult with experts to determine which best suits your unique circumstances.

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