Lori Meadows
Student loans are a significant financial commitment, and failing to pay them back can have serious consequences. While it may be tempting to ignore your debt, defaulting on your student loans can lead to legal and financial repercussions that could affect your life for years to come. The consequences of non-payment vary depending on the type of loan and the terms of your agreement, but generally, you can expect late fees, damage to your credit score, and wage garnishment. If you're struggling to make payments, it's important to seek advice and explore alternative options, such as deferment, forbearance, or modified repayment plans.
| Characteristics | Values |
|---|---|
| Late fees | 6% of the late payment amount |
| Credit score damage | Affects your ability to secure future loans, the interest rates you'll be offered, and your eligibility for renting an apartment |
| Deductions from your paycheck | Up to 15% of your disposable income |
| Default | After 270 days of non-payment |
| Loss of federal repayment options | Unable to apply for deferment or forbearance |
| Debt sold to a collections agency | Additional fees of up to 18.5% of the loan balance |
| Loss of professional licenses | Teachers, healthcare providers, and lawyers are at risk |
| Loss of driver's license | Some states may revoke your driver's license |
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What You'll Learn
Late fees and credit score damage
Late fees
If you have a federal student loan, you are given a grace period during which you don't have to make payments while you're in school or during the grace period, which ends six months after you graduate or leave school. After this grace period, you will have to make monthly payments against the principal and interest. If your payment is one day late, your account is delinquent, and the loan servicer will send you reminders. If your payment is 30 days late, the loan servicer may charge you a late fee. Federal loan late fees are 6% of the late payment amount.
Credit score damage
Your credit score is a key player in your financial journey. This three-digit number can influence your ability to secure future loans, the interest rates you'll be offered, and even your eligibility for renting an apartment. Late or missed payments on your student loan can negatively impact your credit score. A Q2 2025 analysis found that 31% of federal student loan borrowers with a payment due have been reported as 90 or more days delinquent. Even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years.
When your loan defaults, your credit report may reflect multiple missed payments, significantly lowering your credit score. If you've defaulted on your federal student loans, meaning you haven't made a payment in more than 270 days, you can no longer apply for deferment or forbearance. Additionally, your defaulted loans may be sold to a collections agency, which could charge you hefty collection fees.
Therefore, it's crucial to understand your loan terms and seek advice from a financial advisor or legal professional if you struggle to make payments.
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Loan sold to a collections agency
If you are struggling to make your student loan payments, your loan could be sold to a collection agency. This typically happens after 270 days of missed payments for federal student loans, and 90 days for private loans. When this happens, you will begin to receive persistent contact from the collection agency urging you to pay your overdue debt.
Collection agencies may use aggressive and frequent tactics to make borrowers pay their debts. However, 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 also lays out certain rights for borrowers, including that collection agencies:
- Cannot contact borrowers before 8 am or after 9 pm
- Cannot contact borrowers' work if told not to
- Cannot use threatening or obscene language
- Cannot make threats or lie about the debt
If your student loan is sold to a collection agency, there can be financial consequences. Collection agencies will often add fees to the original loan amount, which can be anywhere from 18-40% of the total loan. This can increase your total debt drastically. For example, if your loan balance is $30,000, collection costs could add $6,000 to what you owe.
Additionally, having your loans with a collection agency may make you ineligible for deferments and you could lose subsidized benefits on your loans. Defaulting on your loans can also damage your credit score, which can affect your ability to get a loan for a mortgage or a car, or to open a business. Finally, if you do not repay your debt or enter into a repayment agreement, the collection agency can begin wage garnishment, whereby up to 15% of disposable income can be withheld from your paychecks without a court order.
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Wage garnishment and withheld tax refunds
Defaulting on your student loans can have serious consequences, including wage garnishment and withheld tax refunds. Wage garnishment is when your employer withholds a portion of your wages to pay off your student loan debt. This can happen without a court order, and your employer is required to comply. The federal government can also withhold tax refunds and apply them to your loan balance through the Treasury Offset Program (TOP).
If you are at risk of wage garnishment or withheld tax refunds, there are a few things you can do to try to avoid it. First, it is important to stay in communication with your loan servicer and try to negotiate a repayment plan that works for your financial situation. You can also try to rehabilitate your loan, which involves making a series of on-time payments to get your loans out of default. Consolidating your defaulted loans into a new loan with a fresh repayment term can also help you get out of default and prevent wage garnishment.
If you receive a notice of intent to offset or garnish your wages, you have the right to make a valid objection by arguing that you don't owe the debt, aren't behind on payments, or have other extenuating circumstances. You can do this by filling out and submitting a Request for Review form. You may also request a hearing to make your case against wage garnishment if it would cause extreme financial hardship or if you have other valid reasons.
It's important to stay proactive and responsive throughout this process. Make sure your contact information is up to date with the Department of Education and your loan servicer to ensure you receive important notices and updates. Regularly check your loan status and communicate any changes in your tax liability to your employer to avoid surprises.
While it may be challenging to navigate these situations, there are resources and options available to help you manage your student loan debt and avoid wage garnishment or withheld tax refunds.
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Loss of professional licenses
Failing to pay back student loans can have serious consequences, including the loss of professional licenses. As of 2018, at least 19 states in the US can revoke the licenses of teachers and other professionals if the borrower defaults on their student loans. These laws typically apply to any profession that requires a worker to have a license, certificate, registration, or approval to legally work in the state. For example, in Kentucky, the licenses of 308 nurses and 223 teachers were revoked in recent years for student loan default.
Some states also block the renewal of any professional license for borrowers who default on federal and/or state student loans. Specific occupations that may be affected by these laws include accountants, attorneys, barbers, cosmetologists, correctional officers, debt collectors, dentists, genetic counselors, insurance agents, locksmiths, marriage counselors, pharmacists, roofers, social workers, and veterinarians.
In some states, driver's licenses may also be suspended for failure to repay federal student loans. For example, in Iowa, more than 900 driver's licenses were temporarily suspended in 2012 for non-payment of student loans. However, state officials denied that the law had been recently used, and efforts to formally abolish this statute have failed.
The US Department of Education has significant power to force borrowers to repay defaulted federal education loans, and borrowers should be aware of the potential consequences of default before taking out loans.
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Rehabilitation and payment plans
Defaulting on your student loans can have serious legal and financial repercussions. If you are unable to make your scheduled loan payments, it is important to know the consequences and explore the options available to you. Federal student loans typically offer rehabilitation and payment plan options, whereas private loans often go to collection agencies.
Rehabilitation
Student loan rehabilitation is a method to get your federal student loans out of default. It involves making nine on-time payments over a 10-month period. After rehabilitation, your loan is usually assigned to a new federal student loan servicer, and your loans return to good standing. Collection activities stop, and you regain access to federal student aid and repayment options, such as income-driven repayment plans. Rehabilitation improves your credit score by removing the default from your credit report, although the late payments that led to the default will remain. Starting in July 2027, borrowers will be allowed to rehabilitate their loans up to two times.
Payment Plans
Payment plans are available to help manage the financial burden of student loans. Federal student loans offer income-driven repayment (IDR) plans, where your payments are adjusted based on your income. IDR plans can provide much-needed flexibility, with payments potentially as low as $0. Additionally, your employer may offer repayment assistance, so it is worth checking with your company's human resources department.
If you are facing financial difficulties, it is crucial to act promptly. Missing payments can lead to late fees, damage to your credit score, and wage garnishment. The longer you fall behind, the more severe the consequences can be. Seek advice from financial advisors or legal professionals to understand your options and make informed decisions regarding your student loan repayment journey.
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Frequently asked questions
Failing to pay back your student loans can have serious consequences, including late fees, damage to your credit score, wage garnishment, and the withholding of tax refunds. If you are facing financial difficulties, it is important to contact your loan servicer to discuss options such as deferment, forbearance, or modified repayment plans.
Late or missed payments on student loans can negatively impact your credit score. Defaulting on your loans can result in multiple missed payments being reported to credit bureaus, significantly lowering your credit score and affecting it for up to seven years.
A default on federal student loans typically occurs when you have not made a payment in 270 days. Private loans may have different timelines, with some considering a default after just 90 days of missed payments.
When your student loan is in default, the entire unpaid balance and accrued interest become due immediately. Your loan may be sent to a collections agency, and you may be subject to collection fees. Additionally, your wages may be garnished, and your tax refunds and federal benefit payments may be withheld.
If you are struggling to make payments, there are alternatives to consider. Contact your loan servicer to explore options such as deferment, forbearance, or income-driven repayment plans that can lower your monthly payment. Federal student loans may offer rehabilitation and payment plan options, so it's important to understand your loan terms and seek advice from a financial advisor.
