Lori Meadows
Failing to pay your student loans can have serious consequences, including negative impacts on your financial future, such as a reduced credit rating and the inability to obtain loans or credit cards. If you have federal loans, the government can garnish your wages and social security benefits. Private loans may have more stringent penalties, and you may be considered delinquent if you fail to make payments on time. Therefore, it is crucial to explore options for repayment assistance and to contact your loan servicer if you are struggling to make payments.
| Characteristics | Values |
|---|---|
| Penalty for not paying student loans | Delinquency, negative impact on financial future, default |
| Delinquency | Failure to make timely payments, overdue payment |
| Default | Severely overdue payments, failure to make payments for a predetermined amount of time |
| Consequences of default | Wage garnishment, negative impact on credit rating, inability to access loans or credit cards, social security payout garnishment |
| Options to avoid default | Federal programs (Income-Based Repayment, Pay As You Earn, Saving on a Valuable Education), loan deferment, forbearance, Public Service Loan Forgiveness Program |
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What You'll Learn
Delinquency and default statuses
If you don't make payments on your student loans, you risk defaulting on your loans, which can have several negative consequences. Here's an overview of what happens when you don't pay your student loans and the stages of delinquency and default:
Your student loans become delinquent the first day after you miss a payment. If you take out federal student loans, you have 270 days to bring your account current before your loans enter default status. During this delinquency period, your loan holder may charge you reasonable collection costs, which are fees associated with trying to collect the overdue payment. These collection costs can be up to 16% of your outstanding balance or $40, whichever is less.
If you have private student loans, the timeline to default varies by lender, but it's generally much shorter than for federal student loans. Private lenders may consider your loan to be in default after just one missed payment, or they may give you a 60- or 90-day delinquency period before declaring your loan to be in default. Check your loan agreement or contact your lender to understand its specific policy.
Once your federal student loans enter default, the entire balance becomes due immediately — this is known as acceleration. The government can also garnish your wages and tax refunds, and you lose access to benefits like deferment, forbearance, and income-driven repayment plans. Your loan servicer or the Department of Education can also charge you collection fees on top of what you already owe — these can be as high as 25% of the principal and interest balance of your loan.
For private student loans, the consequences of default depend on your lender. They may also accelerate your loan and require you to pay the entire balance immediately. Private lenders are also likely to report your missed payments to the credit bureaus, damaging your credit score and making it harder to get approved for other types of loans and credit cards in the future. They may also take legal action against you to recoup the money you owe.
To avoid these negative consequences, it's important to stay on top of your student loan payments and communicate with your loan servicer if you're having trouble making payments. If you have federal student loans, you may be eligible for income-driven repayment plans that can lower your monthly payment, or you can apply for deferment or forbearance if you're experiencing economic hardship. If you have private student loans, reach out to your lender to discuss your options.
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Wage garnishment
The amount subject to garnishment is based on an employee's disposable earnings, which is the amount left after legally required deductions, such as taxes. The CCPA sets a maximum amount that can be garnished in any workweek or pay period, regardless of the number of garnishment orders received by the employer. For ordinary garnishments, the weekly amount cannot exceed the lesser of two figures: 25% of the employee's disposable earnings or the amount by which the disposable earnings exceed 30 times the federal minimum wage ($7.25 per hour). If disposable earnings are $290 or more, a maximum of 25% can be garnished.
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Federal benefits withheld
Federal student loans provided by the government come with specific benefits and flexible repayment options. However, when a borrower fails to make timely payments, their lender will initially consider them delinquent. As time passes without payment, the lender will eventually consider the borrower in default. Delinquency occurs when a borrower has failed to pay on time and is now considered late. Default occurs when loan payments are severely overdue, and the borrower has failed to make any payments for a predetermined amount of time. Different lenders will define the terms of default differently.
Missing student loan payments can have negative consequences and penalties, including a negative impact on the borrower's financial future for years to come. Federal benefits, such as Social Security payments, may be withheld or garnished to repay the defaulted federal student loans. The US Department of Education has collected nearly $282 million in collections on defaulted federal student loans through voluntary payments and the Treasury Offset program administered by the US Department of Treasury.
Borrowers who are struggling to make monthly payments can explore options to help avoid the penalties of non-payment. The federal government offers repayment options that can make repayment more manageable. These plans can help borrowers transition to legally compliant repayment plans and access important loan benefits. Additionally, borrowers facing financial hardships can seek assistance to avoid delinquency and default, and to manage the stress associated with large student loan debt.
It is important for borrowers to understand the consequences of missing student loan payments and to seek help if needed. By keeping up with their loan payments, borrowers can maintain their financial wellbeing and avoid potential penalties.
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Debt sold to a collection agency
If you have federal student loans, these are not sold to collection agencies. They will continue to be owned by the federal government or a guaranty agency, even after the loan defaults. However, private student loans are often sold to debt collectors after defaulting. When this happens, you may be able to negotiate a settlement for less than your current balance, as the debt collector will have bought the debt at a discount.
If your private student loan debt is sold to a collection agency, they must prove they have the legal right to collect. This includes providing a Chain of Title, which shows the loan's ownership history. Once your debt is with a collection agency, they might try to work out a repayment plan with you. If you still do not pay, they can take further action to recoup the money, such as wage garnishment. This means they can take a certain amount from each paycheck until your debt is cleared. Private lenders must take you to court and obtain a judgment in their favour before any wages can be garnished.
If your student loans are in collections, you may experience wage garnishment, tax refund seizures, and credit damage. You could also face increased interest rates and fees, and the debt may be sold to other collection agencies, leading to ongoing financial and legal issues. Collection agencies may contact you frequently, and you may experience legal action.
If your student loans have been sent to a collection agency, there are a few ways to resolve the situation. Rehabilitation, consolidation, or settlement are possible paths forward. 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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Loan forgiveness programs
While missing payments on student loans can lead to delinquency and default, which can have negative consequences, there are options to help borrowers avoid these penalties, especially for federal student loans. Federal student loans come with specific benefits and flexible repayment options that are not always available with private student loans.
- Income-Driven Repayment (IDR) Plans: IDR plans base your monthly payment on your income and family size. If you repay your loans under an IDR plan, the remaining balance on your student loans may be forgiven after a certain number of payments over 20 or 25 years.
- Public Service Loan Forgiveness (PSLF): If you work full-time for a government or not-for-profit organization, you may qualify for forgiveness of the entire remaining balance of your Direct Loans through the PSLF program.
- Teacher Loan Forgiveness (TLF): You may be eligible for forgiveness of up to $17,500 if you teach full time for five complete and consecutive academic years in certain elementary or secondary schools serving low-income families. However, you cannot receive benefits under both the TLF and PSLF programs for the same period of teaching service.
- Borrower Defense to Repayment: This is a legal ground for discharging federal Direct Loans. Borrowers can apply for borrower defense for specific reasons, such as if their school closes while they are enrolled or soon after they withdraw.
- Segal AmeriCorps Education Award: Participants who complete a term of national service in an approved AmeriCorps program (AmeriCorps VISTA, AmeriCorps NCCC, or AmeriCorps State and National) are eligible to receive this award, which can be used to repay qualified student loans. AmeriCorps service can also count toward PSLF.
These are just a few examples of loan forgiveness programs available. It is worth exploring the options to understand your eligibility and the specific requirements for each program.
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Frequently asked questions
Failing to pay student loans on time can lead to delinquency and default, which can have serious financial consequences, including a negative impact on credit ratings and the ability to make large purchases. The federal government guarantees most student loans and can act as a debt collector, potentially garnishing wages and social security benefits.
Delinquency occurs when a borrower fails to make a loan payment on time, resulting in a late payment. If the delinquency continues, it can lead to default.
Default occurs when loan payments are severely overdue, and the borrower has failed to make any payments for an extended period. The specific definition of default may vary depending on the lender. Defaulting on a loan can result in various penalties and negative consequences for the borrower's financial future.
If you are having difficulty repaying your student loans, there are options available to help. Federal programs such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving on a Valuable Education (SAVE) offer affordable repayment plans based on income and family size. Loan deferment and forbearance can also provide temporary relief by postponing or reducing payments, although interest may continue to accrue. It is important to contact your loan servicer to discuss these options and prevent default.
