What Can Happen If You Do Not Repay Your Student Loans?

Consequences of Non-Payment or Default Can Be Heavy

College students talking in the library

The crushing debt taken on by Americans in order to get college degrees is having a huge impact on our economy and on our national politics.

By the fourth quarter of 2020, $1.56 trillion student loan debt was outstanding. 44% of those borrowers were actively attempting to make payments as of 2019, while another 9% were considered to be behind on their payments.

COVID-19 Relief

In March 2020, the federal government announced relief for federally-funded student loans: All loan payments and collection on defaulted loans stopped, and interest rates for student loans dropped to 0%, effective through early 2022. On April 6, 2022 the Department of Education extended the pause through August 31, 2022.

If you are considering taking out student loans, or have already taken them out and are struggling with repayment, here are some things you need to know about the consequences of non-payment.

Key Takeaways

If you are struggling to pay off your student loans, depending on the source there may be multiple repayment consolidation plans available.

Interest accrual and payments on Federal student loans have been halted until August 2022.

Delinquency refers to a payment that is late, and this status elevates to default after 270 days.

Consequences from failing to pay off your student loans can be severe, and have long-lasting effects in other areas of your life.

Federal and Private Student Loans Are Different

That $1.56 trillion refers only to debt taken on by students or their parents who took out federal student loans. Some additional debt is owed to private banks and other lenders.

These private loans are collected in a totally different manner and there could be fewer forms of recourse available if your loan is private rather than public.

Consolidation and Repayment Plans Are Available

If you have problems making payments on your federal student loans, be aware that they can be combined into one loan to make repayment easier.

There are also a number of income-based repayment plans, which can give borrowers more time to repay their loan, reducing the financial burden.

The Difference Between Default and Delinquency

A loan becomes delinquent on the first day after a payment due date is missed. There are several stages of delinquency, including 30 days past due, 60 days past due, and 90 days past due.

Each level gets a little more serious. The loan does not go into default until much later, which could be at least 270 days (or nine months) of no payments, depending on the type of loan.

Borrowers whose loans are delinquent still have a number of repayment options. Default kicks a series of responses into action which are much more difficult to resolve.

The Initial Consequences of Default

Once a loan is considered to be in default, the consequences can be severe. The entire unpaid balance plus interest becomes immediately due and payable.

Borrowers lose any eligibility they might have had for deferment, forbearance and other repayment plans. They will not be eligible for any future federal student aid, and the loan account will be turned over to a collection agency.

The Long-Term Consequences of Default

There is no statute of limitations on the collection of federal student loan debt. Although the government may forgive student loans in certain cases, this does not apply to loans in default. Here are a few areas affected by defaulting on student loans:

  • Credit score: This information will be reported to the credit agencies and will affect the borrower's credit rating. That hurts the person's ability to borrow money or even get a job in the future.
  • Government payments and wages: The government can also withhold federal income tax refunds, garnish wages, or withhold Social Security payments to settle the debt.
  • Career and licensure: Depending on how efficient the government is in updating its electronic records, it can affect a person's ability to renew a driver’s license or professional license and even prevent the borrower from enlisting in the Armed Forces.

To make matters worse, the amount of total debt keeps growing. There are additional interest costs, late fees, potential attorney fees, court costs, collection fees, and other costs associated with the collection process which can be added to the amount owed.

Penalties Can Get Serious

The borrower can be sued and taken to court for non-payment.

Once an unpaid loan starts moving through the court process, the judge may issue certain orders. Although a borrower cannot be arrested solely for non-payment of a loan, an arrest warrant can be issued if a judge's orders are not followed.

There may be additional charges if it is determined that fraud was involved in the initial loan application or false information was provided.

Default can affect other people as well. Any co-signers on the original loan will be pursued for repayment. It can even damage the prospects of the borrower’s children when they in turn apply to take out student loans to pay for their own education.

Frequently Asked Questions (FAQs)

How do you get student loans forgiven?

Your options may be limited for private loans, but there are several forgiveness programs for federal student loans. For example, you may qualify for Public Service Loan Forgiveness if you work for a nonprofit or federal, state, local, or tribal government. Check the Federal Student Aid's list of loan forgiveness programs to see which ones you may qualify for.

How do you consolidate student loans?

One way to consolidate federal student loans is with a Direct Consolidation Loan. Log into your Federal Student Aid account and apply online. Private loans can be consolidated by applying for a debt consolidation loan with a bank or another lender.

What happens to student loans when you die?

Federal student loans are discharged upon the borrower's death. This includes any PLUS loans taken out by a parent—the loan can be discharged if that parent dies.

Article Sources

  1. Federal Reserve Bank of New York. "Quarterly Report on Household Debit and Credit 2020:Q4," Page 3.

  2. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2019 - May 2020."

  3. Federal Student Aid. "COVID-19 Emergency Relief and Federal Student Aid."

  4. The White House. "Statement by President Biden Extending the Pause on Student Loan Repayment Through August 31st, 2022."

  5. Federal Student Aid. "Student Loan Delinquency and Default."

  6. New York State Higher Education Services Corporation. "Defaulted Student Loans FAQs."

  7. Consumer Financial Protection Bureau. "What Happens If I Default on a Federal Student Loan?"

  8. The Pew Charitable Trusts. "Student Loan Default Has Serious Financial Consequences."

  9. Federal Student Aid. "Discharge Due to Death."