Douglas Olsen
Student loans have become a pathway to the American dream for many, but they can also be a trap that impacts the lives of millions of Americans. The burden of student loans disproportionately affects Black Americans, who often have to take on more loans than their white peers and face additional financial and personal obstacles. The consequences of defaulting on student loans can be severe, including late fees, credit score damage, wage garnishment, and even the suspension or revocation of professional licenses. With the federal government restarting loan payments after a three-year moratorium, many borrowers are facing the daunting reality of repaying their debts. This has led to growing concerns about the financial vulnerability of those struggling to make payments and the potential impact on their credit scores and overall financial stability.
| Characteristics | Values |
|---|---|
| Impact of not paying student loans | Devastate millions of Americans |
| Moratorium on payments | Three-year moratorium during the coronavirus pandemic |
| Date to start paying back loans | 1st October |
| Consequence of not paying student loans | Late fees, credit score damage, deductions from the paycheck |
| Defaulting on federal student loans | If no payment in 270 days |
| Defaulting on private loans | Varies, but usually 90 days of missed payments |
| Consequence of defaulting on loans | Debt sold to a collection agency, license suspension or revocation |
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What You'll Learn
Late fees and credit score damage
For federal student loans, a one-day late payment can result in a delinquent status, which can be resolved by making a payment or contacting the loan servicer to discuss options like deferment or forbearance. After 90 days, the lender may report the delinquency to major credit bureaus, leading to a likely decrease in the borrower's credit score.
Private student loan lenders may report late payments as soon as 30 days past the due date. This report of delinquency will also result in a likely decrease in the borrower's credit score.
The longer the delay in payment, the more severe the impact on the credit score. After 270 days of non-payment, student loans are considered in default, causing serious damage to the borrower's credit score for up to seven years. Defaulting on a federal loan may also result in the government seizing wages or tax returns as payment. Additionally, co-signers on the loan may also experience negative impacts on their credit.
To avoid late fees and credit score damage, it is essential to make timely payments. If financial difficulties arise, borrowers can explore options like deferment, forbearance, or income-driven repayment plans to temporarily pause or reduce payments without negatively affecting their credit score.
While late student loan payments can have negative consequences, seeking assistance early and utilizing available options can help mitigate the damage to one's financial standing and creditworthiness.
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Loss of federal repayment plan choice
The US federal student loan system is undergoing significant changes that will impact borrowers' repayment plans. The Big Beautiful Bill (BBB) will result in a loss of federal repayment plan choices for borrowers. Here is what you need to know about the upcoming changes:
The Big Beautiful Bill, enacted by the US government, will introduce substantial modifications to federal student loan repayment plans. The BBB repeals the previous plan, SAVE, and mandates a transition to the new standard and Revised Pay-As-You-Earn (RAP) repayment options by July 1, 2026. This shift will impact borrowers who take out federal Direct Consolidation Loans to consolidate multiple federal loans.
Impact on Existing Borrowers:
Existing borrowers currently enrolled in income-driven repayment plans, such as Income-Based Repayment (IDR) and Income-Contingent Repayment (ICR), will experience changes. While there is a three-year transition period until July 1, 2028, for those already repaying federal loans, the new plans differ from the current options. For example, the RAP plan extends the repayment period to 30 years, which student aid expert Mark Kantrowitz has criticized as "indentured servitude."
Interest Charges and Forgiveness:
Interest charges will resume for SAVE borrowers starting in August, impacting those who enjoyed interest-free forbearance under the previous plan. Additionally, the BBB does not extend tax-free forgiveness after 2025. Consequently, if your loan balance is forgiven before 2028, you may be subject to federal income tax on the forgiven amount.
Alternative Options:
Student loan lawyers advise borrowers seeking alternatives to consolidate their loans into the ICR plan before July 2026 to maintain some flexibility. The FSA is also enhancing its Income-Driven Repayment (IDR) process, simplifying enrollment and eliminating the need for annual income recertification. Borrowers can utilize resources like the Loan Simulator and AI Assistant (Aiden) to explore their repayment options.
Delinquencies and Defaults:
It is important to note that these changes come amid a backdrop of widespread delinquency and default on federal student loans. With almost 10 million borrowers potentially in default soon, the Department of Education is resuming collections on defaulted loans, impacting borrowers who have not made payments in over 360 days. The FSA is urging borrowers in default to make monthly payments, enroll in income-driven repayment plans, or sign up for loan rehabilitation.
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Debt sold to a collection agency
When student loans are in default for too long, they may be sold to a collection agency. A collection agency is an entity that recovers unpaid debt from borrowers who have defaulted on their loans. Collection agencies urge borrowers to pay their overdue debt, and they do this by using phone calls and letters. Contact will become more frequent if the borrower does not respond.
Federal student loans go into default after 270 days of missed payment. This gives borrowers roughly nine months to make a payment or make a plan to try to stop their loans from defaulting. When student loans default, they become accelerated, meaning they become due in full immediately. Borrowers will be responsible for all the costs that the lender incurred from the collections process. If your loan is held by the Department of Education, these costs could amount to 20% of your total loan amount. For example, if your loan balance is $30,000, collections costs could add $6,000 to what you owe. If you do not repay your debt or enter into a repayment agreement, the collection agency will begin wage garnishment. The Department of Education can take up to 15% of disposable pay from your paychecks for the defaulted loan. Once wage garnishment starts, it will continue until the debt is repaid or the default is resolved.
Collection agencies may use aggressive and frequent tactics to make a borrower pay their debt. The Fair Debt Collection Practices Act (FDCPA) makes it illegal for debt collectors to use abusive, unfair, or deceptive tactics when collecting debts. The FDCPA lays out rights for borrowers who are in collections, including that collection agencies cannot contact borrowers before 8 am or after 9 pm, they cannot contact borrowers' work if told not to, collectors cannot use threatening or obscene language, and collectors cannot make threats or lie about the debt. If your student loan debt is in collections, the first thing you should do is respond to the collector.
If your federal student loans are in collections, you may be at risk of wage garnishment, tax refund seizures, and credit damage. The only way out is to bring the loan back into good standing through rehabilitation, consolidation, or full payoff. For private student loans, collectors must prove they own the debt. You can request a Debt Validation Letter and check the Chain of Title to challenge invalid or unverified collection attempts. Tuition debts generally have a statute of limitations (usually three to ten years, depending on your state). Once this passes, debt collectors typically can’t sue you, and the debt may drop off your credit report. However, schools may still hold transcripts or block enrollment. Settling private student loans with a collections agency can look different from agency to agency. When you settle a loan, you are agreeing to a lower payment, but it may need to be paid all at once or through an aggressive repayment system.
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Loss of professional licenses
Defaulting on your student loans can have serious consequences, including the loss of professional licenses. While the specific laws vary by state and profession, here is an overview of how not paying your student loans can impact your professional licenses:
Impact on Professional Licenses
The impact of student loan default on professional licenses varies by state and profession. In some states, there are laws that explicitly allow for the suspension or revocation of professional licenses for those who default on their student loans. These laws often apply to
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Rehabilitation and payment plans
Student loan rehabilitation is a method to get your federal student loans out of default. This can be done by making nine on-time payments in 10 months. Rehabilitation payments must be "reasonable", which usually translates to 15% of your discretionary income. However, if this amount is unaffordable, an alternative payment plan can be requested, with payments as low as $5 per month. It is important to note that this rehabilitation process can only be undertaken once, so it is advisable to have a strategy in place to continue making payments after rehabilitation.
Following rehabilitation, your loan exits default status, and collections activity stops. You will regain eligibility for federal student loan benefits, including income-driven repayment (IDR) plans, deferment, and loan forgiveness programs. You can also consolidate out of default by agreeing to repay your new loan under an income-driven plan. However, unlike rehabilitation, consolidation will not remove the default from your credit report, and additional collection costs may be incurred.
If your rehabilitated loan defaults again, you may need to consolidate it out of default, assuming it is your first time consolidating the loan. If it is not your first time, your options are to add another loan to the consolidation or pay your full balance. At this point, your loan holder may agree to a student loan settlement, where you pay less than the original amount owed, or you may need to consider filing for student loan bankruptcy.
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Frequently asked questions
If you don't pay your student loans, you could face late fees, credit score damage, and possibly even deductions from your paycheck. The longer you fall behind on payments, the more serious the financial consequences. You're considered to be in default if your payment is 270 days late. Defaulting on your loans could get your debt sold to a collections agency, which may charge you collection fees.
Federal student loans typically don't report missed payments to credit bureaus until they're 90 days late. Private lenders may report after a payment is 30 days late. Federal loans may offer rehabilitation and payment plan options, whereas private loans often go to collection agencies.
If you default on your federal student loans, you lose the right to choose your federal repayment plan and can no longer apply for deferment or forbearance. Defaulting on private loans can also result in higher collection fees, depending on where you live and your profession.
There are a few strategies to lower your federal student loan payments, such as income-driven repayment (IDR) plans, which use your income and family size to calculate your loan payments and offer the possibility of loan forgiveness. You can also use deferment or forbearance to temporarily pause payments, but interest will accrue during this time.
