Janice Lozano
Student loan debt is a significant issue in the United States, with borrowers owing a combined $1.78 trillion. While some borrowers may be tempted to stop paying their federal student loans, it is important to understand the potential consequences. Failing to repay federal student loans can result in negative consequences such as a lower credit score, difficulty obtaining loans or leases in the future, wage garnishment, tax refund withholding, and legal repercussions. There are, however, options to lower payments and work towards loan forgiveness, such as income-driven repayment plans and loan rehabilitation agreements. Understanding these options can help borrowers manage their debt effectively without defaulting on their loans.
| Characteristics | Values |
|---|---|
| Student loans go away if unpaid | No |
| Student loan repayment resumed | 1 October 2023 |
| Consequence of not paying student loans | Harder to get a credit card, car loan, or apartment lease |
| Consequence of not paying student loans | Negative impact on credit score |
| Consequence of not paying student loans | Immediate requirement to pay the loan balance |
| Consequence of not paying student loans | Garnishment of wages |
| Consequence of not paying student loans | Withholding of tax refund |
| Consequence of not paying student loans | Being sued |
| Loan forgiveness programs | Public Service Loan Forgiveness Program |
| Loan forgiveness programs | Income-driven repayment (IDR) plans |
| IDR plans | SAVE (formerly REPAYE) |
| IDR plans | IBR |
| IDR plans | ICR |
| IDR plans | PAYE |
| IDR plans | Repayment Assistance Plan (RAP) |
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What You'll Learn
Loan forgiveness
Income-Driven Repayment (IDR) Plans
IDR plans such as SAVE (formerly REPAYE), IBR, ICR, and PAYE base your monthly payments on your income and family size. These plans offer the possibility of loan forgiveness after a certain number of qualifying payments. For example, under an IDR plan, your student loan balance may be forgiven after 20 or 25 years (240 or 300 monthly payments) of repayment. It's important to note that during the SAVE Forbearance, no payments are due, but interest will accrue, and you will not receive Public Service Loan Forgiveness (PSLF) credit.
Public Service Loan Forgiveness (PSLF)
If you repay your federal student loans under an IDR plan or a standard 10-year plan, you may be eligible for PSLF. Working full time for a government or not-for-profit organization can also qualify you for forgiveness of the remaining balance of your Direct Loans.
Teacher Loan Forgiveness
Teachers may qualify for loan forgiveness if they teach full time for five complete and consecutive academic years in certain elementary or secondary schools serving low-income families. The amount of forgiveness can be up to $17,500, and other qualifications must be met.
Total and Permanent Disability (TPD) Discharge
If you have a disability that severely limits your ability to work, you may be eligible for a TPD discharge. This applies to both physical and mental disabilities. With a TPD discharge, you don't have to repay your federal student loans, and you're exempt from completing any outstanding service obligations.
It's important to explore the official websites and resources to understand the specific requirements and eligibility criteria for each of these loan forgiveness options. Additionally, seeking guidance from official sources can help you navigate the application process and ensure you're taking the necessary steps to achieve loan forgiveness.
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Garnished wages
If you default on your federal student loans, the federal government can garnish your wages without taking you to court. This is called an administrative wage garnishment. After your obligation becomes past due for longer than 270 days, the federal government can garnish up to 15% of your disposable pay. The Social Security Administration can also withhold up to 15% of your Social Security income to cover delinquent student loan debt through the Treasury Offset Program. The federal government can also garnish other sources of income, including state and federal tax returns.
Private student loans generally default after three months of missed payments, and lenders must get permission from a court to garnish your wages. A private lender can garnish up to 25% of your weekly disposable income, depending on your earnings and location.
If you receive a notice of wage garnishment, you have 30 days to request a hearing to explain why the government shouldn't garnish your wages. You can also request a review of your case by contacting the Department of Education Default Resolution Group. The government may consider defences such as an existing repayment agreement, a pending bankruptcy case, or the school's misrepresentation of the loan or program. In cases of significant financial hardship, the government may stop wage garnishment.
To avoid wage garnishment, you can negotiate repayment terms with the Department of Education or the collection agency assigned to your account. You must make the first payment within 30 days of the wage garnishment notice being sent. Private lenders may also be willing to negotiate a repayment agreement or loan settlement.
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Rehabilitation agreements
Loan rehabilitation is a process that can help borrowers get their federal student loans out of default. It involves entering into a written rehabilitation agreement with the loan servicer, which typically requires making nine consecutive payments based on one's income. For Perkins Loans, borrowers must make the full standard payment.
To initiate the loan rehabilitation process, borrowers should contact their loan holder or servicer to establish a rehabilitation agreement. Adhering to the terms of this agreement allows borrowers to avoid negative consequences such as wage garnishment, tax refund offset, and the loss of Social Security benefits. Once the final payment under the loan rehabilitation agreement is made, the loan is removed from default.
It is important to note that loan rehabilitation is a one-time opportunity. If a borrower defaults again after rehabilitating a loan, they cannot rehabilitate the same loan a second time. However, this rule does not apply to borrowers who rehabilitated their loans during the pandemic payment pause or those who utilised the Fresh Start programme to resolve their default status.
To prevent future defaults, borrowers must stay vigilant about making their monthly loan payments. Additionally, borrowers can explore other options to manage their federal student loan payments, such as consolidating their loans or entering into a repayment agreement. Seeking assistance from organisations like the U.S. Department of Education's Default Resolution Group can provide further guidance on navigating these financial challenges.
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Repayment Assistance Plan (RAP)
The Repayment Assistance Plan (RAP) is a federal student loan repayment system that was introduced by the Big Beautiful Bill, which was passed by Congress in 2025. The plan is set to come into effect in July 2026.
RAP consolidates the various repayment options into one main choice for new loans. It calculates payments as a percentage of a borrower's entire adjusted gross income (AGI), with a minimum monthly payment of $10. This means that even the lowest-income borrower must send at least $10 a month, and there would be no more $0 student loan bills. The percentage of income starts low and rises gradually, with a cap of 10% for AGI above $100,000. Like the previous SAVE plan, RAP cancels any unpaid interest each month, preventing balances from growing if the required payment is made. Any remaining loan balance after 30 years (360 payments) is forgiven.
RAP has been criticised for potentially being unaffordable for low-income borrowers, as it does not disregard any income when calculating payments, unlike the previous SAVE plan. The minimum monthly payment of $10 could be a burden for families struggling with other costs. Additionally, the maximum repayment term is extended to 30 years, which could trap low-income borrowers in debt for longer. The plan also removes the option to defer payments in cases of job loss or economic hardship.
Supporters of RAP argue that a token payment of at least $10 keeps borrowers in regular contact with their loan servicers and reduces the likelihood of loans falling off the radar. The plan also simplifies the federal student loan system by providing one main repayment option, although critics argue that the plan is poorly designed and overly complicated for the federal government to administer.
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$6.99
Bankruptcy discharge
While it is challenging, it is not impossible to discharge student loan debt through bankruptcy. Both federal and private student loans can be discharged in bankruptcy. However, it is essential to remember that bankruptcy is often considered a last resort due to its potential negative impact on your credit score and the costs and time involved in the filing process.
If you are considering bankruptcy, it is advisable to consult an experienced bankruptcy attorney to discuss your options. When you file for bankruptcy, any collections or payments on your student loans and other debts will be automatically paused until the case is concluded or a judge orders a resumption of payments. It is important to note that even if your bankruptcy is approved, your student loans will not be automatically discharged.
To seek a discharge of your student loans through bankruptcy, you must specifically request the judge to do so. This involves filing a petition for an adversary proceeding, where you will need to demonstrate undue hardship. The court will decide whether undue hardship exists, and if you are seeking to discharge federal student loans, the judge will ask the federal government, represented by the Department of Justice (DOJ), whether it agrees that you are experiencing undue hardship.
During the adversary proceeding, the DOJ will request that you complete an attestation of undue hardship. If the DOJ agrees that you are facing undue hardship, it will recommend that the judge grant a full or partial discharge of your student loans. Even if the DOJ does not recommend a discharge, the judge can still find that you are experiencing undue hardship and discharge your loans. For example, a 50-year-old borrower earning a low wage was granted a discharge due to their inability to pay off the loans and meet their basic needs, indicating a cycle of poverty.
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Frequently asked questions
Failing to repay a federal student loan on time can result in additional fees if your debt gets moved into collections. It can also negatively impact your credit score, making it harder to get a mortgage, car loan, credit card, or apartment lease. If you default on a federal student loan, the government can take your tax refund, garnish your wages, or sue you.
Yes, you may be able to lower your federal student loan payments through "Income-driven repayment" (IDR) plans, which use your income and family size to calculate your loan payments. These plans also offer the possibility of loan forgiveness after a certain number of years of qualifying payments.
The SAVE Forbearance is a period during which borrowers with certain IDR plans (SAVE, formerly REPAYE) do not have to make payments. Interest will begin accruing on August 1, 2025, and participants will not receive Public Service Loan Forgiveness (PSLF) credit during this time.
The Repayment Assistance Plan (RAP) is a new IDR plan that will replace the SAVE, PAYE, and ICR plans. It is expected to be available in 2026.
Unlike some other forms of debt, it can be difficult to get student loans discharged in bankruptcy. Borrowers are still required to repay student loans even if they don't graduate or are struggling to find a job.
