Lana Oconnell
Failing to pay your student loans can have serious consequences, including late fees, a lower credit score, wage garnishment, and even the suspension or revocation of professional licenses. The specific repercussions depend on the type of loan, the repayment terms, and how late the payment is. Federal student loans typically go into default if payments are more than 270 days late, while private loans may be considered in default after 90 days. If you're struggling to make payments, it's important to explore alternative options, such as income-driven repayment plans, loan deferment, or forbearance, to avoid the severe financial and legal consequences of defaulting on your student loans.
| Characteristics | Values |
|---|---|
| Late fees | Up to 6% of the overdue amount |
| Credit score damage | Harder and more expensive to borrow money in the future |
| Deductions from your paycheck | 15% of disposable income withheld without a court order |
| Loss of professional licenses | Teachers, healthcare providers, and lawyers have had licenses suspended or revoked |
| Loss of driving license | Some states have revoked driving licenses |
| Default | After 270 days, debt may be sold to a collections agency |
| Loss of future federal student aid | No longer eligible if you return to school |
| Loss of tax refund | Tax refund may be withheld |
| Loss of federal benefits | Social Security and other federal benefits may be withheld |
| Interest accrual | Interest continues to accrue on the debt |
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What You'll Learn
Late fees and credit score damage
Late student loan payments can have significant negative consequences, including late fees and damage to your credit score. Here's what you need to know:
Late Fees
If you're struggling to make your student loan payments on time, you may incur late fees. These fees can vary depending on the loan servicer and the specific terms of your loan. It's important to review your loan agreement to understand the potential late fees and other penalties you may face.
Credit Score Damage
Late student loan payments can also damage your credit score. Your payment history is a crucial factor in determining your credit score, accounting for about 35% of it. If you're late on your payments, your loan status may change from "current" to "delinquent." This delinquency will be reported to the major credit bureaus, resulting in a decrease in your credit score. The timing of these reports depends on the type of loan you have. For private loans, lenders may report late payments after 30 days, while for federal loans, it usually occurs after 90 days.
Once your loan is considered delinquent, it can stay on your credit report for up to seven years, impacting your ability to secure future loans or credit lines. After 270 days of non-payment, your student loans are considered in default, which is a serious situation. Defaulting on your student loans will severely damage your credit score and may affect your eligibility for future financial aid.
To mitigate the damage to your credit score, consider enrolling in deferment or forbearance programs, or exploring income-driven repayment plans. These options can provide temporary relief and help you avoid delinquency or default. Additionally, making timely payments can help build a strong payment history, which is essential for maintaining a good credit score.
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Deductions from your paycheck
Defaulting on your student loans can have serious consequences, including deductions from your paycheck, also known as wage garnishment. This means that a creditor or loan servicer is allowed to take a portion of your disposable income to repay your debt. For federal student loans in the United States, up to 15% of your paycheck can be deducted without a court order. This is allowed under the Treasury Offset Program, which allows federal agencies to collect past-due debts from other government programs.
The specific process for wage garnishment can vary depending on the type of loan you have and the laws in your country or state. In the case of private student loans in the US, for example, the lender must take legal action before they can garnish your wages. The maximum percentage they can garnish is typically 25% of your wages.
It's important to note that wage garnishment is often a last resort for lenders. Before taking this step, they will usually send multiple reminders and notifications. If you are struggling to make your student loan payments, it's best to contact your lender directly to discuss alternative repayment plans or deferment options.
The consequences of not paying your student loans can be severe and can impact various aspects of your life. Defaulting on your loans can also result in late fees, damage to your credit score, suspension of professional licenses, and the loss of eligibility for other financial aid. It is always advisable to prioritize repaying your student loans and to communicate with your lender if you are facing financial difficulties.
Additionally, defaulted federal loans offer the option to set up a loan rehabilitation program. This can help you get back on track with your payments and avoid further consequences. It is important to be mindful of your options and seek help when needed to manage your student loan debt effectively.
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Defaulting on your loans
Your loan servicer is allowed to deduct 15% of your disposable pay for federal student loan payments without taking you to court. Your tax refund or any federal benefits you're entitled to can also be withheld for federal student loans. The Treasury Offset Program allows the government to withhold tax refunds and federal benefits to repay defaulted federal student loans.
The consequences of missing student loan payments depend on the type of loan you have and how late your payment is. If your payment is one day late, your account is delinquent, and the loan servicer will send you reminders. If the payment is 30 days late, the loan servicer may charge you a late fee. Federal loan late fees are 6% of the late payment amount. If the payment is 90 days late, the loan servicer can report the late payments to the three major credit bureaus: Experian, Equifax, and TransUnion. This can cause your credit score to drop, making it tougher and more expensive to borrow money in the future. If someone, such as a parent, co-signed your loans, missed payments can hurt their credit score too.
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Loss of professional licenses
In the United States, failing to pay student loans can have serious consequences, including the loss of professional licenses. This means that government agencies in certain states can seize or suspend state-issued professional licenses from individuals who default on their student loan payments. This can effectively prevent these individuals from working in their licensed professions.
As of 2018, at least 19 states were reported to have laws allowing for the revocation or suspension of professional licenses for non-payment of student loans. These laws can apply to a wide range of professions, including teachers, health professionals, veterinarians, attorneys, engineers, psychologists, barbers, firefighters, nurses, massage therapists, lawyers, and real estate brokers. The specific professions affected vary by state.
The enforcement of these laws has been inconsistent across states. While some states, like Tennessee, have been aggressive in enforcing license revocation, others rarely enforce these laws or have never done so. Additionally, the number of people who have lost their licenses due to student loan defaults is challenging to determine, as many state agencies and licensing boards do not track this information.
The impact of losing a professional license can be significant, as it can disrupt careers and affect individuals' ability to work and earn an income. This can create a cycle of financial hardship, making it even more challenging for individuals to repay their student loans.
In recent years, there has been a pushback against these laws, with states like Montana, Oklahoma, and New Jersey repealing their license revocation provisions. However, as of 2018, many states still retained these laws, and the potential risk of losing a professional license due to student loan defaults remains a concern for borrowers.
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Interest accrual
For those with federal student loans, there is the option of an Income-Driven Repayment (IDR) plan, which can provide some relief. Under an IDR plan, your monthly payments are based on a percentage of your discretionary income, and you may benefit from a longer repayment term. While this can make your payments more manageable, it's important to note that extending the repayment period may result in paying more interest over time.
Private student loans typically do not offer the same flexibility as federal loans when it comes to interest accrual and repayment plans. However, if you are experiencing financial hardship and are unable to make payments on your private student loans, refinancing may be an option to consider. Refinancing can potentially lower your interest rate or extend your repayment term, reducing your monthly payment burden.
Regardless of the type of loan, failing to make timely payments can have significant consequences. If you fall behind on your federal student loan payments, you may be charged late fees, and the accruing interest will continue to increase your loan balance. Additionally, missed payments can be reported to credit bureaus, damaging your credit score and impacting your future borrowing capabilities.
It is important to prioritize staying current on your student loan payments to minimize interest accrual and avoid the negative financial consequences of delinquency or default. If you anticipate difficulty in making payments, explore options such as IDR plans or refinancing to mitigate the impact of interest accrual and maintain your financial stability.
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Frequently asked questions
The consequences depend on the type of loan and how late the payment is. If you have federal loans, you may be eligible for a loan deferment or forbearance if you're experiencing financial hardship. If your payment is 270 days late, your account is considered to be in default, and the loan servicer can take severe measures, including sending your account to a collections agency, garnishing your wages, and taking your tax refund.
A loan deferment or forbearance allows you to postpone your payments for a period of time, giving you a chance to financially recover. With federal forbearance or deferment, you can pause your payments if you're experiencing financial emergencies, such as job loss. Some private student loan companies also have their own financial hardship policies, so it's best to talk to your lender about your options.
If your student loan debt is sold to a collections agency, they will persistently contact you to collect payment. They may also charge you collection fees, which can be hefty, up to 18.5% of your federal loan balance, and even more for private loans. Additionally, some states have revoked driver's licenses from individuals who have defaulted on certain student loans.
Missing student loan payments can negatively impact your credit score. Lenders typically report missing payments to credit bureaus after a certain number of days (the timeframe varies depending on the lender and loan type). A lower credit score can make it more difficult and expensive to borrow money in the future, and it may even impact areas like job applications, cell phone contracts, utility services, and housing applications.
Yes, there are options available for student loan forgiveness and income-driven repayment (IDR) plans. The Public Service Loan Forgiveness Program offers federal debt forgiveness for individuals working in public service jobs after 10 years of payments. Additionally, President Biden implemented the SAVE (Saving on a Valuable Education) plan, which provides enhanced financial benefits, including forgiving loans with an original principal amount of $12,000 or less after 10 years of payment.
