Douglas Olsen
Failing to pay back government student loans can have serious consequences. These include damage to your credit score, wage garnishment, and the loss of tax refunds or federal benefits. The government has multiple programs in place to retrieve the money owed, and the debt will remain with you until it is paid in full. Student loans are also not dischargeable in bankruptcy, and the only official way to remove the default from your credit report is through loan rehabilitation.
| Characteristics | Values |
|---|---|
| Wage garnishment | The government can deduct up to 40% of your wages for repayment. |
| Tax refunds | Any federal benefits or tax refunds owed to you can be withheld. |
| Credit score | Defaulting on loans will negatively impact your credit score. |
| Loan forgiveness | In some cases, such as permanent disability or death, the government may discharge federal student loans. |
| Bankruptcy | Student loans are generally not discharged in bankruptcy unless deemed an "undue hardship". |
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What You'll Learn
Wage garnishment
If you default on your student loan payments, you may face wage garnishment. This means that the government can take a portion of your paychecks to cover your loan payments. Wage garnishment can have a significant impact on your finances, as it reduces your disposable income and can make it difficult to cover your living expenses.
The amount that can be garnished from your wages varies depending on the state you live in and the type of income you receive. In some states, the government can garnish up to 40% of your wages. However, federal law protects borrowers by ensuring they are left with a certain amount of money. According to higher education expert Mark Kantrowitz, the U.S. Department of Education can garnish up to 15% of your disposable or after-tax pay. This means that you must be left with at least $217.50 per week, which is 30 times the federal minimum hourly wage of $7.25.
It is important to note that wage garnishment is not immediate and there are steps you can take to protect your wages. Typically, it takes time for garnishment to begin, and you will receive a notice beforehand. You can also contact the government's Default Resolution Group to explore alternative options, such as enrolling in an income-driven repayment plan or signing up for loan rehabilitation. If wage garnishment will result in financial hardship, you may be able to challenge it. Additionally, if you have recently been unemployed or filed for bankruptcy, your wages may be protected.
While student loan borrowers have experienced relief measures during the COVID-19 pandemic, with collection efforts being paused, these measures are not permanent. As of May 2025, more than 5.3 million student loan borrowers are in default, and the Trump administration announced the resumption of collection activities, including wage garnishment. Therefore, it is essential for borrowers to stay informed about their rights and options to manage their loan obligations effectively.
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Tax refunds withheld
If you default on your student loan payments, the government can take your federal income tax refund. This is known as a tax refund offset. Computer records of all borrowers in default are sent to the IRS. If you are in default on your federal student loans, all or a portion of your tax refund may be taken and applied automatically to your federal student loan debt.
Before your taxes are taken for the first time, you should receive a letter informing you that your refund is being offset and providing information about requesting a hearing to stop the tax refund offset. If you didn't receive this letter, or if you want to see if you are on the list to have your refund taken, call the Treasury Offset Program at 1-800-304-3107.
If you receive a letter from the federal government letting you know that your tax refunds are being taken to pay back your student loan debt, don't ignore it. First, make sure that the letter is not a scam. There are a lot of scammers pretending to be the government. Before you call any numbers on any letter you receive, make sure to do an internet search to verify that the number you are calling is actually the federal government. Once you have confirmed it is not a scam, you can take steps to try to stop the tax refund offset by requesting a review.
The process for challenging tax refund offsets may change over time. The government will typically consider whether you have any defences to repaying your student loan debt. For example, you may have already entered into a repayment agreement with the loan holder and are making payments as required, or you may have filed for bankruptcy.
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Credit score affected
Credit scores are complex, and it is rare for a single action to have a simple effect on your score. However, it is clear that not paying government student loans will negatively impact your credit score.
Firstly, it is important to note that missed payments will result in late fees, which vary by lender. Some lenders charge a flat rate, while others charge a percentage of the missed payment. After several months of missed payments, or once the account is 270 days delinquent, your student loan will enter default. At this point, the entire outstanding balance for your student loan will become due.
The damage to your credit score will remain on your credit report for seven years. A new delinquency on your credit report can drop your credit score by more than 150 points. Those with superprime credit scores (760 or higher) can expect average credit score declines of 171 points, while those with subprime credit scores (below 620) can expect average declines of 87 points.
However, it is important to note that as long as your loans are not delinquent or defaulted, your credit score probably won't go down. Additionally, if you are not required to make payments, your loans are reported as in good standing each month, which has a positive impact on your payment history.
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Debt sold to a collection agency
If you have unpaid student loan debt, it can be sold or transferred to debt collection agencies without your knowledge. Debt collectors are required to provide proof of your debt in writing if you request it. You can also ask them to stop contacting you, although they may still sue you or sell your debt to another collection agency.
If you have federal student loans, you may have additional options for dealing with a federal student loan collector. Rehabilitation, for example, allows you to remove the default notation from your credit history by making a series of consecutive, reasonable, and affordable payments. Alternatively, if you can afford to pay off your defaulted federal loan, this is the fastest way to settle your debt. In some cases, your debt collector may even be authorized to waive some of your outstanding fees and other collection costs.
If you have private student loans, there are no standard options for dealing with a collection agency beyond paying what is owed. However, you may be able to negotiate or set up a payment plan. It's important to remember that a debt collector seeking to recover a private student loan does not work for or represent the U.S. Department of Education or any other federal government branch.
Regardless of the type of loan, it's crucial to know your rights when dealing with debt collectors. They are not allowed to harass, threaten, or lie to you. If you believe you have been treated unfairly, you can seek legal advice or file a complaint with the Consumer Financial Protection Bureau (CFPB) or your State Attorney General's Office. Additionally, be cautious about making payments on old debts, as this could extend the time a debt collector has to collect. Always verify that the statute of limitations has not expired before taking any action.
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Government crackdown
The US government has been criticised for its handling of student loan debt, with some arguing that the Biden administration was too lenient on borrowers. In contrast, the Trump administration has taken a harder line, resuming loan collections from past borrowers and reinstating the previous system for loan collection, which includes wage garnishment. This has sparked concerns about the impact on borrowers' weekly paychecks and credit ratings.
The government's crackdown on unpaid student loans has been characterised as a necessary measure to ensure fairness to taxpayers. Indeed, it is argued that if borrowers have the means to repay their loans, it is unfair for taxpayers to bear the burden. However, critics have questioned the approach, suggesting that widespread garnishment could have a deflationary effect on the economy, reducing spending on essential goods and services.
While the government's actions may be justified from a fiscal perspective, they have sparked concern among those struggling to repay their student loans. The resumption of loan collections and the threat of wage garnishment have left borrowers facing difficult choices about how to manage their finances. This is particularly challenging for those who can only afford to pay the interest on their loans, making little progress on reducing the principal amount.
The government's crackdown has also highlighted the complexities of student loan debt. While some borrowers may have irresponsibly accumulated debt, others may have been impacted by unforeseen circumstances, such as the COVID-19 pandemic or changes in their employment or health status. These factors can significantly affect one's ability to repay loans, underscoring the need for flexible repayment options and support programmes.
Ultimately, the government's crackdown on unpaid student loans has wide-ranging implications. While it aims to address concerns about fairness and fiscal responsibility, it also underscores the need for comprehensive solutions that balance the interests of taxpayers, borrowers, and the broader economy. Striking this balance is crucial to ensuring that student loan debt does not become an insurmountable burden for individuals or a drag on economic growth.
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Frequently asked questions
The government can garnish your wages, meaning they can deduct up to 40% of your disposable pay, depending on the state you live in. They can also withhold your tax refunds and any federal benefits you're entitled to.
A default on student loans stays on your credit report for 7 years after your first missed payment. This can affect your credit score and make it difficult to secure loans or financing in the future.
No, you cannot go to jail for failing to pay your student loans. However, the government has various methods to collect the debt, including wage garnishment and withholding tax refunds and federal benefits.
Yes, the government has programs in place to go after your spouse for the money, even if you file taxes jointly.
Student loans are challenging to discharge in bankruptcy. The bankruptcy court must determine that repaying the loans would cause "undue hardship" based on your income before they can be forgiven.
