Lori Meadows
Student loan debt is a significant issue, with US borrowers owing a combined $1.77 trillion. Defaulting on student loans can have serious consequences, including a negative impact on your credit score, denial of new credit applications, and legal action taken by the government. While student loans are unsecured, meaning property cannot be seized, your wages may be garnished, and tax refunds withheld. It's important to explore options like extended repayment plans, deferment, forbearance, and income-driven repayment plans to avoid default. Federal student loans offer more assistance options, while private loans depend on the lender and are generally less supportive.
What happens if you don't pay your student loan?
| Characteristics | Values |
|---|---|
| Credit score impact | When a loan payment is 90 days overdue, it is considered delinquent and reported to major credit bureaus, negatively affecting the credit score. |
| Difficulty in availing new credit | New credit applications may get denied, or one may receive higher interest rates due to being labelled as a risky borrower. |
| Employment and other implications | A poor credit score may impact employment prospects, obtaining a cell phone contract, renting a home, and securing loans for a car or mortgage. |
| Default and debt collection | After 270 days of non-payment, the loan is in default. The government can act as a debt collector for federal loans, and private lenders may sue to seize assets or garnish wages. |
| Loss of student aid | In Canada, missing nine months of payments results in the federal part of the loan being sent to the Canada Revenue Agency (CRA) for collection, and the borrower loses access to future student aid until the loan is brought up to date. |
| Interest accrual | Interest continues to accrue on the unpaid loan balance, increasing the overall cost of the loan. |
| Limited repayment options | Defaulted loans are ineligible for federal repayment assistance programs, income-driven plans, deferment, or forbearance. |
| Loan discharge and bankruptcy | Loan discharge is challenging and reserved for extreme cases, such as permanent disability. Bankruptcy rarely discharges student loans, requiring proof of undue hardship through a separate legal process. |
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What You'll Learn
Your credit score will be affected
Failing to pay your student loan can have significant consequences for your credit score, which can affect your financial health and stability in the long term. Here's what you need to know:
Your credit score is a critical aspect of your financial profile, as it represents your creditworthiness to potential lenders, creditors, and even landlords. This score is based on various factors, including your payment history, debt-to-income ratio, and the length of your credit history. When you miss payments on your student loan, this information is typically reported to credit bureaus, and it can negatively impact your credit score. Late or missed payments are considered delinquent and can remain on your credit report for several years, potentially lowering your score and making it more difficult to obtain credit in the future.
The impact of delinquent student loan payments can be far-reaching. For example, a lower credit score may lead to higher interest rates on loans or credit cards, resulting in you paying more over time. Additionally, it could affect your ability to secure an apartment or even get a job, as some employers may review your credit history as part of the hiring process. A poor credit score can also limit your options when it comes to refinancing your student loans or consolidating your debt at a lower interest rate.
To minimize the damage to your credit score, it's essential to take proactive measures. Stay in communication with your loan servicer and be transparent about any challenges you're facing in making payments. They may be able to offer temporary solutions, such as forbearance or deferment, which would temporarily pause your payments, giving you some breathing room while you get back on track financially. Alternatively, they might discuss enrolling you in an income-driven repayment plan that adjusts your monthly payments based on your income and family size.
It's also important to understand the differences between federal and private student loans when it comes to credit score implications. Federal student loans often come with more borrower-friendly benefits, including income-driven repayment plans and loan forgiveness programs. Private student loans may have fewer options for relief, and missing payments on these loans can more quickly and severely impact your credit score. Regardless of the type of loan, staying proactive and exploring alternative repayment plans can help mitigate potential damage to your creditworthiness.
Remember, maintaining a good credit score is vital for your overall financial health. Taking ownership of your student loan payments and seeking assistance when needed demonstrates financial responsibility and ensures a more stable path toward achieving your long-term financial goals.
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You may be sued by the government
If you fail to pay your student loan, the government may sue you. This means that the government will take legal action against you to recover the debt. Here are some things you should know and steps you can take if you find yourself in this situation:
Firstly, understand the consequences of being sued. The government can garnish your wages, seize your tax refunds, and even take a portion of your Social Security benefits to repay the loan. They may also work with a collection agency to recover the debt, which could result in additional fees and interest being added to the amount you owe.
Secondly, if you are sued, do not ignore the lawsuit. Respond to the court summons and seek legal advice immediately. You have the right to defend yourself in court and present your case. It is important to take this opportunity to negotiate a settlement or repayment plan that works for you. Ignoring the lawsuit will only result in a default judgment against you, giving the government more power to collect the debt through the means mentioned above.
Thirdly, be proactive and communicate with your loan servicer or the government agency handling your loan. Explain your situation and try to work out a solution before it escalates to a lawsuit. You may be eligible for loan consolidation, income-driven repayment plans, or temporary relief through forbearance or deferment. These options can help lower your monthly payments and prevent default.
Additionally, if you believe that the terms of your loan were unfair or that the lender engaged in fraudulent behaviour, you may have legal grounds to fight the lawsuit. In this scenario, consulting with an attorney who specialises in student loan law is crucial. They can review your loan documents and advise you on your rights and options, which may include filing a counterclaim or defending against the lawsuit based on violations of consumer protection laws.
Remember, the government has significant resources and legal authority to collect on defaulted student loans. Taking proactive measures, understanding your rights, and seeking legal assistance can help you navigate this complex situation effectively and work towards a resolution that minimises financial hardship.
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Your wages could be garnished
If you fail to pay your student loan, your wages could be garnished. This means that a court orders your employer to withhold a portion of your wages and send it directly to the lender to pay off your debt. The process of wage garnishment for student loans varies depending on whether your loans are federal or private.
For federal student loans in the US, the government can garnish your wages without a court order. Before this happens, you'll typically receive a written notice that your loan servicer intends to start garnishing your wages, giving you a chance to take action to avoid it, such as by enrolling in an income-driven repayment plan or applying for a deferment or forbearance.
Private student loan lenders must first sue you in court and obtain a wage garnishment order before they can start taking money from your paycheck. You'll usually receive notice of the lawsuit and have an opportunity to respond before the court issues a judgment.
The amount that can be garnished is limited by law. Generally, lenders can take up to 15% of your disposable income, which is your income after mandatory deductions, such as taxes. However, the exact amount varies depending on the type of debt and the garnishment laws in your state.
To garnish your wages, your lender or the government must provide your employer with a garnishment order. This order outlines the amount to be withheld from each paycheck and the length of the garnishment. Your employer is typically required to comply with the order and cannot terminate your employment because of wage garnishment.
It's important to note that wage garnishment is not the sole consequence of defaulting on student loans. Default can also damage your credit, making it challenging to secure other loans or credit forms in the future. Additionally, any loan co-signers may be held responsible for the debt and face adverse consequences.
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You'll lose access to federal student aid
If you default on your federal student loans, you'll eventually lose access to federal student aid. This means you won't be able to receive any more federal grants or loans to help pay for your education. This can be a significant consequence, especially if you're still in school and relying on financial aid to pay for your tuition and other expenses.
When you default on your federal student loans, your loans will likely be transferred to a collection agency, who will then begin the process of recovering the debt. At this point, you'll no longer be eligible for any federal student aid, including grants, loans, and work-study programs. This means that you'll need to find other sources of funding to continue your education.
If you're considering enrolling in a new programme and you've previously defaulted on your federal student loans, you'll need to make satisfactory arrangements to repay your existing loans before you can receive any additional federal student aid. This may involve entering into a repayment agreement with your loan holder or the collection agency, and consistently making your payments on time.
It's important to note that even if you're not currently in school, losing access to federal student aid can still have significant implications. For example, if you're thinking of returning to school in the future, you may find yourself unable to do so without access to federal grants or loans. Additionally, if you have children who are planning to attend college, your default may impact their ability to receive certain types of financial aid as well.
The consequences of defaulting on your federal student loans are serious and can have long-lasting effects on your financial aid options. To avoid losing access to federal student aid, it's important to stay on top of your loan payments and contact your loan servicer as soon as you anticipate any difficulties in making your payments. By staying proactive and communicating openly, you can work together to find a solution and maintain your eligibility for federal student aid.
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You may be able to defer or pause payments or use an income-driven repayment plan
If you're unable to make your student loan payments, you may be able to consider an income-driven repayment (IDR) plan to lower your monthly payments. IDR plans are designed to make your student loan payments more manageable by adjusting your monthly payments based on factors like your income, family size, and tax filing status.
To explore this option, you can start by logging into your StudentAid.gov account and visiting your Dashboard to check your loan type. Different IDR plans have specific eligibility requirements, and your loan type can impact your eligibility. For instance, defaulted loans are not eligible for any IDR plans, and certain loan types, such as Direct PLUS Loans for parents, are not eligible for IDR plans unless consolidated into a Direct Consolidation Loan.
The first step in applying for an IDR plan is to submit an IDR Plan Request. During the application process, you may be required to manually provide a signature if your servicer doesn't support e-signatures. After submitting your application, you can check its status on your My Activity page. If your application is placed in "processing forbearance," it means your servicer needs additional time to process your request.
Before applying for an IDR plan, you can use the Loan Simulator tool to estimate how your loan repayment would change under different plans. This tool will ask for basic information, such as your income, family size, tax filing status, and state of residence, and then present various plan options for you to review. Remember that your loan servicer is also a valuable resource if you have questions about your repayment options.
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Frequently asked questions
Loans are considered delinquent immediately after one missed payment, but your lender or loan servicer might not report you as late to the major credit bureaus until you’re 90 days past due. You may face late fees, and a late payment may result in a late payment fee.
If you are more than 30 days late on a federal student loan payment, the lender could charge a late fee of up to 6% of the overdue amount. If you are more than 270 days late on payment, you are considered to be in default. When you default on your loans, your whole loan balance is due immediately, so you lose the right to choose your federal repayment plan. You can no longer apply for deferment or forbearance. You would also lose the option to take out future federal student aid if you go back to school. Defaulting on your loans could get your debt sold to a collections agency, which could charge you hefty collection fees.
The government can take your federal and state tax refunds and garnish your wages. If you have private student loans, your assets could be at risk if the lender sues you in court and the judge rules in their favour.
Depending on the state you live in, the government can garnish up to 40% of your wages. You will need to rehabilitate, consolidate or refinance your loan and agree to a repayment plan.
