What Happens If You Don’t Pay Student Loans?

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When you don’t pay your student loans, a series of events can unfold, each with its own set of challenges. You’ll be considered delinquent if you’re late by just 90 days, which can hurt your credit score. If the situation persists for 270 days, your loan goes into default, leading to more severe repercussions like wage garnishment or losing eligibility for further financial aid. However, there are ways to manage your debt and avoid these pitfalls, such as income-driven repayment plans, consolidation, or student loan forgiveness programs.

Let’s break down what happens when those student loan payments are left hanging and how to dodge the pitfalls. 

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9 consequences of not paying student loans

What happens if you skip out on student debt? The short answer: a lot. Here’s a rundown of what you could face if you don’t make those payments.

1. You’ll be considered delinquent

Missing a student loan payment by even a single day can set off a chain of events, but if you’re 90 days overdue, things get more serious. At this point, your loan servicer will mark your account as delinquent. This isn’t just a minor inconvenience; being delinquent can lead to late fees and penalties that increase your overall debt. Additionally, this status will be reported to the credit bureaus, causing your credit score to drop. A lower credit score can make it more difficult to secure loans or credit cards in the future, and it can affect your ability to rent an apartment or get a job.

2. Your account will be in default

If you continue to miss payments and reach 270 days of non-payment, your loan will enter default status. Defaulting on a student loan is a serious issue that brings significant consequences. For federal loans, the entire unpaid balance and interest become due immediately. Your account may be turned over to a collection agency, which will aggressively pursue repayment. You lose eligibility for federal student aid and other federal benefits, and the debt can continue to grow due to additional fees and interest. The default will also be reported to the credit bureaus, further damaging your credit score and financial reputation.

3. Your entire loan balance will become due

When a student loan goes into default, lenders can accelerate the debt, meaning they can demand immediate payment of the full outstanding balance. This process, known as “acceleration,” can be financially devastating, especially if you’re unprepared to pay the entire amount at once. Your options at this point include paying off the debt in full, rehabilitating the loan to remove the default status, or consolidating your loans to create a new repayment plan. However, each of these options comes with its own set of challenges, fees, and requirements, making it crucial to address the situation as early as possible.

4. You may be denied federal financial aid

One of the lesser-known consequences of defaulting on federal student loans is the loss of eligibility for additional federal financial aid. This means that if you plan to return to school, you won’t be able to receive federal grants, loans, or work-study opportunities. You may be disqualified from enrolling in income-driven repayment plans, which could help you manage your payments based on your income level. This situation can significantly impact your ability to pursue further education and career advancement, locking you into your current financial situation.

5. Your wages may be garnished

If your loan goes into default, one of the most immediate and impactful consequences can be wage garnishment. The federal government or private lenders have the authority to take a portion of your paycheck to cover the unpaid loan. For federal loans, this can happen without a court order, and up to 15% of your disposable income can be garnished. For private loans, lenders must first sue you in court, but if they win, they can garnish your wages as well. This automatic deduction can strain your finances further, leaving you with less money to cover essential expenses.

6. Your tax refunds may be withheld 

Another tool the federal government uses to recover defaulted student loans is the Treasury Offset Program. It can legally apply your tax refunds to your outstanding student loan balance. If you’re expecting a tax refund and have defaulted on your loans, don’t be surprised if it doesn’t show up in your bank account. This action can be particularly frustrating if you’re relying on that refund to cover other financial obligations. Unlike private lenders, the federal government has the power to do this without going through the court system, making it a swift and efficient collection method.

7. Your Social Security benefits may be garnished 

For borrowers who default on their federal student loans and are receiving Social Security benefits, those benefits may be at risk. The federal government can garnish a portion of your Social Security benefits to recover the debt. This garnishment can take up to 15% of your monthly benefits, though certain protections ensure that a minimum amount is untouched. This can be a harsh consequence, particularly for elderly or disabled borrowers who rely on Social Security as a primary source of income. It’s a clear reminder that student loan debt can follow you into retirement and beyond.

8. Your credit score will be negatively affected

Failing to make student loan payments can seriously damage your credit score, which is a key factor in your financial health. Each missed payment is reported to the credit bureaus, causing your score to drop. A lower credit score can have widespread implications, affecting your ability to obtain new credit cards, loans, or rent an apartment. You may also face higher interest rates on any new credit you are approved for, increasing your overall financial burden. The longer the default status remains on your credit report, the more challenging it becomes to recover and rebuild your credit.

9. Your co-signer may be held responsible

If someone co-signed your student loan, they are equally responsible for the debt. In the event of missed payments or default, the co-signer’s credit score will also suffer, and they may be required to make the payments you can’t. This can strain relationships, as the financial burden shifts from you to your co-signer. The negative impact on their credit can also limit their financial opportunities, making it harder for them to get loans or other forms of credit. Communicate with your co-signer if you’re having trouble making payments, as their financial well-being is directly tied to your loan.

What should you do if you can’t pay your student loans?

If you’re struggling with student loan payments, several options could help you manage your debt:

1. Apply for student loan forgiveness or discharge

Programs like Public Service Loan Forgiveness or Total and Permanent Disability Discharge can forgive your loans under certain conditions.

2. Take advantage of an income-driven repayment plan

Income-driven repayment (IDR) plans adjust your monthly student loan payments based on your income and family size, making them more affordable. There are several types of IDR plans, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).

These plans typically cap your monthly payments at a percentage of your discretionary income, and any remaining balance may be forgiven after 20 or 25 years of qualifying payments. While this can significantly lower your monthly payments, it’s important to note that the forgiven amount may be considered taxable income.

3. Consolidate your student loans

Student loan consolidation lets you pay your balance in full and end up with a new loan. You can adjust the term duration and add more years on the back end to lower your monthly payment. Depending on available loans, you may also be able to secure a lower interest rate with consolidation. You also get to put the late payments behind you and start fresh with a new loan.

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4. Explore the option of deferring your student loans

Deferment allows you to temporarily pause your student loan payments, typically for up to three years, during times of economic hardship, unemployment, or enrollment in school. While deferment can provide short-term relief, it’s essential to understand the implications. For subsidized federal loans, the government may cover the interest during the deferment period. For unsubsidized loans, interest will continue to accrue, increasing the overall loan balance. 

5. Consider student loan forbearance

Student loan forbearance lets you temporarily pause payments or make smaller payments. Interest will accrue while the loan remains in forbearance. The government recommends considering an income-driven payment plan instead.

6. Refinance your student debt

Refinancing your federal student loan can make the monthly payments more manageable. You can extend the loan’s term and possibly get a lower interest rate. You can only refinance your debt with a private lender. If you get a private loan, you lose out on federal benefits, such as an income-driven payment plan. A refinance can reduce your monthly payments and wipe away late payments. But you have to consider whether a refinance is worth losing the federal benefits.

Managing Your Debt

While the consequences of not paying your student loans can be serious, you can take steps to avoid or mitigate these outcomes. Stay informed and proactive in managing your debt.

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