Savanna Hoffman
Failing to pay student loans can have serious consequences, but these may not be immediate. Defaulting on federal student loans means you have not made a payment in over 270 days, and this can have a negative impact on your credit score, making it harder to get a car, an apartment, or a phone plan. The government can garnish your paycheck, take your tax refunds, and even dip into your Social Security checks. There is no expiration date on federal loans, and bankruptcy is rarely a way out. However, there are Income-Driven Repayment (IDR) plans available that may lower your monthly payment, and in some cases, your balance could be forgiven after a certain number of years of qualifying payments.
| Characteristics | Values |
|---|---|
| Default | If you miss payments for 9 months (270 days), your loans go into default, and the entire balance is due right away. |
| Credit Score | Defaulting tanks your credit score, making it harder to get a car, rent an apartment, or get a phone plan. |
| Government Action | The government can garnish your paycheck, take your tax refunds, and dip into your Social Security checks without a court order. |
| Loan Expiration | There is no expiration date for federal loans, and they can haunt you forever. Bankruptcy is also rare. |
| Property Seizure | While rare, the government can sue and put a lien on your home if you default. |
| Income-Driven Repayment (IDR) | You can enroll in an IDR plan to lower your monthly payments based on your income. |
| Closed Institution Forgiveness | If your school shut down while you were a student or shortly after, you can apply to have your federal loans canceled. |
| Death | If you pass away before paying off federal loans, the remaining debt is discharged. |
| Credit Report | A default on student loans stays on your credit report for 7 years after your first missed payment. |
| Federal Reporting | Federal lenders typically don't report missed payments until they're 90 days late, while private lenders may report after 30 days. |
| Private Loans | There are no standard options to lower monthly payments on private loans, but some lenders offer modified repayment plans. |
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What You'll Learn
Late fees
In addition to late fees, there are other consequences to missing student loan payments. Unpaid interest may be capitalized, increasing the total amount repaid over the life of the loan. Negative consequences on your credit score may also occur, making it more challenging to secure favourable terms for future credit needs, such as mortgages or new credit cards. It is important to note that the impact on your credit score may not be immediate, but it can affect your ability to make significant purchases or secure loans in the future.
Furthermore, if the account is handed over to a collection agency, collection costs may be added to the loan balance. Lenders may also take legal action to recover the outstanding amount, resulting in additional legal fees and potential court judgments. In cases of default, where an individual has missed payments for a prolonged period (typically around 9 months), the entire loan balance becomes due immediately. Defaulting on federal student loans can result in the loss of eligibility for future federal financial aid.
To avoid late fees and other penalties, it is essential to prioritize loan payments in your budget and stay timely with your payments. Enrolling in AutoPay can help ensure timely payments and provide a small discount on interest rates for federal student loan borrowers. Additionally, marking payment due dates on a calendar can help you stay aware of your budget and manage your finances effectively. If you are facing financial hardships, explore options such as deferment or forbearance to temporarily halt payments and communicate with your loan servicer to discuss alternative solutions.
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Credit score damage
Credit scores are complex, and it is rare for a single action to have a sole effect on your score. However, if you don't pay your student loans, you will likely face credit score damage.
Your payment history is the most important factor in determining your credit score. Therefore, a loan default can drop your score significantly. For example, a payment that is 90 days late could cause your score to drop by as many as 150 points. A lower credit score could make it more challenging and expensive to borrow money in the future. Additionally, late payments can stay on your credit report for up to seven years.
If your student loan payment is 90 days late, the loan servicer can report the late payments to the three major credit bureaus: Experian, Equifax, and TransUnion. This will negatively impact your credit score. If your payment is 270 days late, your account will be entered into default. At this point, the lender may take severe measures, including reporting the default to the credit bureaus, sending the account to a collection agency, garnishing your wages, and taking your tax refund. Defaults will remain on your credit report for seven years, making it difficult to qualify for credit cards, mortgages, and other forms of credit.
If someone, such as a parent, co-signed your loans, missed payments can also hurt their credit score. Therefore, it is essential to make your student loan payments on time to maintain a healthy credit score.
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Wage garnishment
If you don't pay your student loans, your credit score will take a hit, making it harder to get a car, rent an apartment, or even get a phone plan. The government can also garnish your wages, take your tax refunds, or dip into your Social Security checks, and they don't need a court order to do so. Wage garnishment is when your loan holder orders your employer to withhold a portion of your disposable pay to collect your defaulted debt. They can do this without taking you to court, and this withholding ("garnishment") will continue until your defaulted loan is paid in full or the default status is resolved. While it's not common, the government can also put a lien on your home if they sue and win.
It's important to note that federal student loans are different from credit card and other types of debt. There are income-driven repayment (IDR) options available for federal student loans, so there is usually no need or reason to default. However, if you do default on your federal student loans, your wages can be garnished. The U.S. Department of Education has announced that it will resume collections of defaulted federal student loans, and as part of this initiative, they will be authorizing wage garnishment for borrowers in default.
The process of wage garnishment can vary depending on the type of loan and the state you live in. In some cases, up to 15% of your disposable pay can be withheld to repay your defaulted debt. This can cause a significant financial hardship, as one person experiencing wage garnishment mentioned that it put them in a difficult spot. Additionally, it's important to note that wage garnishment is not the only consequence of not paying your student loans. Defaulting on your loans can also wreck your credit and prevent you from qualifying for other types of loans, such as car loans or mortgages.
To avoid wage garnishment and other negative consequences, it's important to stay on top of your student loan payments and explore alternative repayment options if you're struggling to make ends meet. The U.S. Department of Education has also stated that they will be providing clear information and resources to borrowers to help them understand how to return to repayment or get out of default. There are also other options to consider, such as income-driven repayment plans or loan rehabilitation programs, that can help you manage your student loan debt without resorting to wage garnishment.
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Loss of federal benefits
If you have federal student loans, you may be eligible for loan rehabilitation and payment plan options. However, if you default on your federal student loans, you will face serious consequences, including the loss of federal benefits. Here are some ways in which not paying your student loans right away can impact your federal benefits:
Wage Garnishment
If you default on your federal student loans, the government can garnish your wages. Wage garnishment allows your loan servicer to deduct up to 15% of your disposable pay for federal student loan payments without taking you to court. This means that your income could be significantly reduced, impacting your ability to meet your basic needs.
Tax Refund Withholding
The government can also withhold your tax refunds to recover the past-due amounts. This is done through the Treasury Offset Program, which collects overdue payments from government agencies that would typically send money to debtors. Losing your tax refund can be a significant financial setback, especially if you were relying on that money for other financial obligations or goals.
Loss of Eligibility for Federal Programs
Defaulting on your federal student loans can result in the loss of eligibility for other federal programs. This means you may no longer qualify for certain benefits or assistance programs that you might have otherwise been entitled to. This can further compound the financial difficulties you may be facing.
Impact on Credit Score
Defaulting on your student loans can severely damage your credit score. A low credit score can make it more difficult to access other forms of credit or loans in the future, rent an apartment, obtain a phone plan, or even get a credit card. A poor credit score can also impact your ability to secure certain types of employment or pass background checks.
Loan Rehabilitation
It is important to note that if you find yourself unable to make payments on your federal student loans, there are options to avoid default. You can contact your lender and set up a loan rehabilitation program. This typically involves agreeing to make reasonable payments over a set period to bring your loans out of default. While this may not directly address the loss of federal benefits, it can help you get back on track and potentially regain some financial stability.
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Debt collection
Defaulting on student loans has serious consequences. Federally funded student loans cannot be discharged in bankruptcy, and there is no statute of limitations on them. This means that there is no time limit for the government to collect the debt. If you have not made a payment on your federal student loans in more than 270 days, your loans will go into default, and you will face serious consequences. These consequences include losing your tax refunds, a portion of your wages, and even some of your Social Security benefits.
The government typically uses third-party collection agencies to collect unpaid student loans. These agencies compete to see who can collect the most money, which has led to many reports of abuse. The government can also garnish wages without a judgment, a process referred to as "administrative wage garnishment," which requires that you are given a written warning before the garnishment takes place. These garnishments can continue until the entire loan is paid off.
Defaulting on student loans will also negatively impact your credit score, making it harder to obtain loans or credit in the future. It is important to explore all options before defaulting, such as changing your repayment plan, consolidating federal loans, refinancing private loans, or applying for deferment or forbearance to temporarily pause payments. If you have defaulted on private loans that have been sent to collections, you may be able to negotiate with the agency to lower the amount they will accept to settle your debt.
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Frequently asked questions
The consequences depend on the type of loan and how late the payment is. Here are some possibilities:
- Late fees
- Credit score damage
- Deductions from your paycheck
- Losing the right to choose your federal repayment plan
- Wage garnishment
- Losing the option to take out future federal student aid
- Losing your driver's license
For federal student loans, an account is typically considered to be in default after 270 days of non-payment. For private loans, this can happen much sooner, sometimes within 90 days.
If your account is in default, the loan servicer can take severe measures, including reporting the default to credit bureaus, sending the account to a collections agency, garnishing your wages, and taking your tax refund.
If you're having financial difficulties, you may be able to request a deferment or forbearance, which will allow you to delay payments without the consequences of defaulting. You can also explore income-driven repayment plans or seek financial assistance from family or other sources to help make payments.
Ignoring your student loans is not a viable option. While it may not affect you immediately, it will catch up with you eventually, and the consequences can be severe, impacting your credit score, finances, and even your professional licenses.
