Savanna Hoffman
Student loan debt is a significant issue, with millions of borrowers in the United States facing challenges in making their monthly payments and avoiding default. As of 2024, approximately 42.7 million borrowers owe more than $1.6 trillion in student debt, and the situation has only worsened since then. For those who cannot keep up with their student loan payments, the consequences can be severe, including wage garnishment, seizure of tax refunds, and negative impacts on credit history and scores. With the federal government actively pursuing the collection of defaulted federal student loans, borrowers must understand their options for repayment and the potential outcomes of non-payment.
| Characteristics | Values |
|---|---|
| Number of borrowers in default | 5 million |
| Number of borrowers in late-stage delinquency | 4 million |
| Percentage of borrowers in repayment and current on loans | 38% |
| Date the U.S. Department of Education will resume collections on defaulted federal student loans | May 5, 2025 |
| Date from which Congress mandated that borrowers begin to repay student loans | October 2023 |
| Date from which the Department of Education stopped processing applications for enrollment in repayment plans | August 2024 |
| Expected date for the processing of applications to resume | The following month (unspecified year) |
| Date the Treasury Offset Program will restart | Monday, May 5, 2025 |
| Average monthly payment to get out of default | As low as $5 |
| Consequences of not paying | Losing tax refunds, garnished wages, loss of Social Security benefits, negative impact on credit history and score, collection fees, continued interest charges |
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What You'll Learn
The federal government can garnish your wages, tax refunds, and Social Security benefits
If you default on your federal student loans, the US federal government can garnish your wages, tax refunds, and Social Security benefits. This means that the government can withhold a portion of your income to repay your student loan debt.
The federal government can take these steps without needing a court order. The amount withheld can be up to 15% of your wages, and this will continue until your defaulted loan is paid in full or you are removed from default. You should receive a letter before your wages are garnished, informing you of your right to request a hearing or review to stop the process.
It is important to note that your employer cannot fire you for having your wages garnished by the government to repay your student loan debt. However, you may experience frequent calls from collection agencies, and they will seize your tax refunds.
To avoid these consequences, it is advisable to get out of default as soon as possible. Rehabilitation is typically the most favourable option, and your required payments to get out of default could be as low as $5 per month, depending on your income.
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Default hurts your credit history and score
Defaulting on student loan debt can have serious repercussions on your credit history and score. A default is a negative mark on your credit report, which can stay for up to seven years. This can significantly lower your credit score, sometimes by over 100 points, and prevent you from accessing affordable loans, credit cards, and mortgages. It may also lead to a cycle of additional credit damage and financial challenges.
The negative mark on your credit report indicates to lenders that you have fallen behind or stopped making payments altogether. This can lead to further issues, as lenders may charge higher interest rates, making borrowing more expensive. It can also result in your wages being garnished, tax refunds seized, and relentless pursuit by collection agencies.
The longer you miss payments, the more your score will decrease. Additionally, seeking a lot of credit in a short period can also negatively impact your score, as each credit inquiry is recorded as a hard inquiry, which remains on your credit report for two years.
It is important to note that defaulted student loans are not eligible for deferment or forbearance. You must first resolve the default. Rehabilitation is often the best option, with required payments as low as $5 per month to get out of default.
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Collection fees are added to defaulted loans
If you default on a federal student loan, you will be responsible for additional "reasonable collection costs" on top of late fees, interest, and the principal balance. These collection costs can include attorney fees, collection agency charges, and court costs. Federal student loan collection fees are typically capped at about 25% of your outstanding balance, but private lenders set their own fees, often between 20-25%, and may include additional court and attorney costs.
Collection costs are added to defaulted loans once they are considered to be in collections, which for federal student loans, is usually after about 270 days without payment. Private student loan lenders may add collection fees sooner, often around 120 days of missed payments, depending on the loan contract terms and lender practices.
The collection charges for defaulted Direct Subsidized and Unsubsidized Loans, as well as PLUS Loans, can be up to 18.5% of the unpaid principal and accrued interest when the rehabilitated loans are sold. For Perkins Loans, the collection charges are 30% for the first collection attempt and 40% for subsequent attempts. If a defaulted Perkins Loan is rehabilitated, the collection charge is 24%. Borrowers who seek a lump-sum settlement may be able to get the collection charges waived.
Historically, borrowers could waive federal collection fees by completing loan rehabilitation, which involved making nine qualifying payments. However, the Department of Education has recently paused or significantly reduced collection fees, removing the need for rehabilitation-based fee waivers. During the Fresh Start initiative and the student loan payment pause, the Department did not charge any collection fees for rehabilitation or consolidation. As of May 2025, the structure of collection fees remains unclear.
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Interest continues to be charged
If you are unable to pay your student loan debt, it is important to know that interest continues to accrue during forbearance for all federal loans and during deferment for unsubsidized loans. This means that even if you are not making payments on your loans, the interest on the loan amount will continue to increase. Over time, this can significantly add to the total amount that you owe.
For example, let's say you have a student loan with an initial principal amount of $10,000 and an interest rate of 6% per annum. If you are unable to make any payments and the loan accrues interest during forbearance or deferment, at the end of the first year, you will owe $10,600. The interest for the second year will now be calculated on this new principal amount, so at the end of the second year, you will owe $11,236. This process continues, and the longer you are unable to make payments, the more interest will accrue, increasing the total amount you owe.
To avoid this, it is important to explore alternative repayment options. The US Department of Education offers income-driven repayment plans, such as the new SAVE plan, which can reduce monthly payments to as low as $0. Under the SAVE plan, if your monthly payment doesn't cover the accrued interest, that interest will not be charged to you. Additionally, loan rehabilitation programs can help you get back on track by offering lower required payments, depending on your income.
It is also worth noting that defaulted student loans are not eligible for deferment or forbearance. Therefore, if you anticipate difficulty in making payments, it is best to explore these alternative options before your loan reaches the default stage.
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You won't be eligible for new federal student loans or grants
If you are unable to pay your student loan debt, you may face serious consequences that can impact your financial future. One of the key consequences is that you won't be eligible for new federal student loans or grants. This means that if you were planning to pursue further education or need additional financial support, you may not be able to access the funds necessary to do so.
Federal student loans and grants are often crucial for students who need assistance in covering the costs of their education, including tuition, fees, books, and living expenses. However, when an individual defaults on their student loan payments, it can lead to a breach of trust with the lending institutions and the government. As a result, lenders and the government may become hesitant to extend additional credit or financial aid to individuals who have demonstrated an inability to repay their existing student loan debt.
Ineligibility for new federal student loans or grants can significantly limit your options for pursuing further education or advancing your career. Federal student loans often offer favourable terms, low-interest rates, and flexible repayment options that are tailored to students' needs. Losing access to these funding sources may mean that you have to rely on private loans, which typically come with higher interest rates and less favourable repayment terms. Alternatively, you may be forced to delay your educational plans until you can save up enough funds to cover the costs on your own.
Additionally, being ineligible for federal student aid can impact your eligibility for certain scholarships, grants, and work-study programs that often consider a student's financial need when awarding funds. This can further limit your ability to secure the necessary financial resources to continue your education. It is important to remember that maintaining good financial standing and demonstrating responsibility in repaying your student loan debt is crucial to keeping your options open for future educational endeavours.
If you are facing difficulties in repaying your student loans, it is important to take proactive measures. Communicate with your loan servicer to explore alternative repayment plans, loan consolidation, or loan forgiveness programs that may provide some relief. Seeking timely assistance and staying engaged in managing your student loan debt can help prevent long-term consequences, such as ineligibility for new federal student loans or grants, and protect your financial prospects in the future.
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Frequently asked questions
If you can't pay your student loan debt collection, you may face serious consequences, including losing your tax refunds, a portion of your wages, and even some of your Social Security benefits.
You have rights when dealing with debt collectors and it is against the law for a collector to harass you or make false statements. You may be able to negotiate or set up a payment plan.
The fastest way to get out of default is to consolidate your loans through a new loan with new repayment terms.
Rehabilitation means that your loan will be taken out of default status after you make a series of consecutive, reasonable, and affordable payments. Depending on your income, your required payments to get out of default could be as low as $5 per month.
