Janice Lozano
Failing to pay back student loans can have serious consequences. The consequences of not paying depend on the type of loan and how late the payment is. For federal loans, there is no statute of limitations, and the government can act as a debt collector. For private loans, debt collection procedures vary by state, and the debt is not legally collectible after the statute of limitations is up. In both cases, missed payments can lead to a damaged credit score, wage garnishment, and the seizure of property.
| Characteristics | Values |
|---|---|
| Consequences | Depend on the type of loan and how late the payment is |
| Federal student loans | No standard options to lower monthly payments; may be able to enrol in an Income-Driven Repayment (IDR) plan |
| Private student loans | Lenders may offer modified repayment plans; no standard options |
| Late payment (1 day) | Account is delinquent; loan server sends reminders |
| Late payment (30 days) | Late fee of 6% of the late payment amount |
| Late payment (90 days) | Reported to credit bureaus; credit score affected |
| Late payment (270 days) | Account entered into default; loan servicer can take severe measures |
| Default | Loan servicer can report default to credit bureaus, send the account to a collections agency, garnish wages, take tax refunds, and place liens on property |
| Credit score | Damaged; may result in denied credit applications or higher interest rates |
| Co-signer | Credit score harmed; may be called upon for payments, face debt collection, or be sued |
| Disability | Loans may be forgiven |
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What You'll Learn
Late fees and credit score damage
Federal Student Loans
If you have a federal student loan and your payment is one day late, your account is considered delinquent, and the loan servicer will send you reminders. If the payment is 30 days late, the loan servicer may charge you a late fee, typically 6% of the late payment amount. After 90 days, the loan servicer can report the late payments to the three major credit bureaus: Experian, Equifax, and TransUnion. This can cause your credit score to drop by as much as 150 points. Once your account is 270 days past due, it is considered in default. At this point, the loan servicer can take severe measures, including reporting the default to the credit bureaus, sending the account to a collections agency, garnishing your wages, and taking your tax refund.
Private Student Loans
Private student loans have different timelines and consequences for late payments. Lenders may report late payments after 30 days, and your credit score will likely be affected. After 270 days, private loans are also considered in default, and your credit score will be damaged. It's important to note that private student loans fall off your credit report after seven years and are no longer legally collectible once the statute of limitations is up, depending on the state.
Protecting Your Credit Score
Late or missed payments on student loans can have a significant negative impact on your credit score. Since payment history accounts for 35% of your credit score, maintaining timely payments is crucial. Additionally, deferment, forbearance, and income-driven repayment (IDR) plans can help mitigate damage to your credit score by providing temporary relief during financial hardship. Consolidating defaulted federal loans through a Direct Consolidation Loan can also help you regain eligibility for federal loan benefits and additional financial aid, although the record of default will remain on your credit history.
In summary, late fees and credit score damage are serious consequences of not paying student loans. The impact on your credit score and the fees charged depend on the type of loan and the length of delinquency. It's important to stay on top of your payments and seek assistance when needed to avoid these negative outcomes.
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Wage garnishment
The consequences of wage garnishment can be severe. Firstly, it can wreck your credit score, making it difficult to qualify for new loans or obtain rental properties, as landlords often consider credit history. Secondly, wage garnishment can reduce your disposable income significantly, impacting your ability to manage daily living expenses and causing financial hardship.
It's important to note that wage garnishment is not the only recourse for unpaid student loans. Other consequences include damage to your credit score, tax refund garnishment, liens on your property, and late fees. However, wage garnishment is a serious measure that can be taken to recover defaulted student loan debt.
To avoid wage garnishment, it's crucial to stay on top of your student loan payments and seek assistance when needed. There are also options to explore if you're struggling to make payments, such as income-driven repayment plans, loan rehabilitation, or deferment and forbearance options. These options can help you manage your student loan debt and prevent the severe consequences of default, including wage garnishment.
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Tax refund garnishment
If you are unable to pay back your student loans, you risk your account being placed in default. This can have serious consequences, including damage to your credit score, and the loss of your tax refunds, wages, and even some of your Social Security benefits.
In the case of federal student loans, there is no statute of limitations, and the government can take steps to collect debts that are years old. The Treasury Offset Program, administered by the U.S. Department of the Treasury, allows the government to withhold tax refunds and federal benefits to repay defaulted federal student loans. This means that if you are in default, the government may take all or a portion of your tax refund and apply it to your federal student loan debt.
You should receive a letter before your taxes are taken for the first time, informing you that your refund is being offset and providing information about requesting a hearing to stop the tax refund offset. If you have not received such a letter, you can call the Treasury Offset Program at 1-800-304-3107 to check if you are on the list to have your refund taken.
It is important to note that there may be changes to the way the government collects student loan debts and the process for challenging tax refund offsets. If you are facing difficulties in repaying your student loans, it is recommended to seek assistance and explore options such as income-driven repayment plans or loan rehabilitation programs.
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Loan deferment or forbearance
If you're struggling to make your student loan payments, you may be considering loan deferment or forbearance. Both options can help you avoid defaulting on your loans, but they have different implications. Let's explore each option in detail:
Loan Deferment
Loan deferment is when your lender allows you to temporarily stop making payments or reduce your payments for a set period. Deferment is generally available if you have subsidized federal student loans or Perkins loans and meet certain criteria. These criteria typically include situations such as being unemployed, experiencing significant financial hardship, receiving government assistance, serving in the military, or undergoing medical treatment. One of the key advantages of loan deferment is that for certain types of loans, such as subsidized federal loans and Perkins loans, interest does not accrue during the deferment period. This means the amount you owe at the end of the deferment will remain the same, providing a true break from your loan payments.
Loan Forbearance
Loan forbearance is another option if you don't qualify for deferment or if your financial challenges are expected to be temporary. Forbearance allows you to pause or reduce your loan payments for a specified period. However, unlike deferment, interest continues to accrue during forbearance, increasing the total amount you owe. Forbearance may still be a preferable option if you need to free up funds for other expenses or if it is a shorter-term solution to your financial situation. Most private lenders that offer forbearance do so for a minimum of 12 months.
It's important to remember that neither deferment nor forbearance is a long-term solution to student loan repayment challenges. If you anticipate that your financial situation will not improve, consider enrolling in an income-driven repayment plan instead. Additionally, starting in 2027, federal student loan borrowers will see stricter limits on forbearances and deferments, with deferments for unemployment and economic hardship no longer available.
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Debt sold to a collection agency
If your student loan payments are 270 days (about nine months) late, your account will be entered into default. This means that the loan servicer can take severe measures, including sending the account to a collections agency.
Once your debt is sold to a collection agency, they might try to work out a repayment plan with you as a first step. If you still do not pay, the collection agency can take further actions to recoup the money, such as trying to garnish your wages. Wage garnishment means that the collection agency can take a certain amount from each paycheck and apply it towards your debt. For federal student loans, the collection agency cannot take more than 15% of your disposable income without a court order. However, they are also not required to take you to court before garnishing your wages. On the other hand, private student loans function differently. Private lenders must follow garnishment rules laid out for private debt, which means they must take you to court and obtain a judgment in their favor before garnishing your wages.
In addition to wage garnishment, you may also experience tax refund offsets or seizures. The government can withhold tax refunds and federal benefits (like Social Security) to repay defaulted federal student loans. This is known as the Treasury Offset Program.
If you are facing student loan debt collection, it is important to take swift action to resolve the issue. You can bring the loan back into good standing through rehabilitation, consolidation, or full payoff. For private student loans, you can also request a Debt Validation Letter and check the Chain of Title to challenge invalid or unverified collection attempts.
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Frequently asked questions
Failing to pay your student loans can have serious consequences, including late fees, credit score damage, and deductions from your paycheck. If you default on your loans, your debt could be sold to a collection agency, and you may lose your driving license.
The time it takes to default on your loans depends on whether they are federal or private. Federal loans typically default after 270 days of no payment, whereas private loans can default after 90 days.
If you are struggling to make your loan payments, contact your loan servicer to discuss your options. You may be able to lower your monthly payment by enrolling in an income-driven repayment plan or extending the amount of time you have to repay the loan. You can also look into deferment or forbearance options to postpone your payments.
