You cannot go to jail for failing to pay federal student loan or private student loan debt.
You can go to jail, however, for failing to comply with a court order.
Here's how that works.
Let's say you're sued by a debt collector or the US Department of Education for unpaid student loans. You lose the lawsuit, and a judgment is entered against you. Later, the court orders (e.g., a summons) you to come to court for a hearing to find out what assets you have to pay back the loans.
The federal government banned debtors' prisons in 1833. (Debtors' prisons still live on in other forms in the United States, however.)
If you fail to show up to that hearing, you will have ignored a court order. By ignoring that order, the judge can hold you in contempt of court.
And when they hold you in contempt of court, you can be arrested. And that is the only way you can go to jail for a student loan.
Click here to learn What Should I Do If I Can't Pay My Student Loans?
But didn't someone go to jail for not paying his student loans?
Not really. A few years back, there were headlines everywhere, saying a man was arrested by US Marshal's for not paying his student loans.
Turns out, that man, Paul Aker, didn't go to jail for not paying his student loans. Instead, he was arrested because he repeatedly failed to comply with a court order to answer the summons, which led to the judge issuing an arrest warrant.
When he was taken to court, he appeared before the judge and was released. He got zero jail time. The judge did, however, slap him with a $1200 fine for having to order the US Marshals to arrest him.
What are the consequences of not paying student loan debt
The consequences of student loan default depend on whether you default on federal loans or private loans.
When you default on federal student loans, your Department of Education loan servicer will first send your loans to the Debt Management/Default Resolution Group.
From there, the DRG will send your loans to a collection agency.
The collection agency is authorized to:
- send a wage garnishment order to your employer
- offset your tax refund and
- send a garnishment order to offset your Social Security benefits
Consequences of defaulting on private student loans
Defaulting on private student loans have less severe consequences.
Private student loan lenders don't have the same collection powers as does the Department of Education.
When you default on a private student loan, private lenders cannot automatically garnish your wages or garnish your bank account. Instead, the only things they or the collection agency they hire can do to collect the outstanding debt is:
- demand you pay your student debt
- report your late student loan payments and default status to the credit bureaus and
- sue you for your unpaid debt
In my experience, private lenders typically wait until the statute of limitations is close to running out before they sue.
So if you're thinking of defaulting to negotiate a student loan settlement, you shouldn't have to worry about a lawsuit for a few years.
Damage to credit report
One other consequence of defaulting on either federal loans or private loans is the interest rate increasing on your credit cards and other financed debt.
Here's how that works.
When you default, the monthly payments you missed will be reported to the credit reporting bureaus. Those late payments will cause your credit score to drop. And when your credit score drops, that can trigger a clause in your other debt that allows them to increase your interest rate.
Click here to learn How Long Will Student Loans Stay on my Credit Report?
What to do if your student loans are in default
For federal student loans, you have 4 repayment options:
- negotiate a federal student loan settlement
- apply for loan consolidation
- enter into the loan rehabilitation program and
- enter into a voluntary repayment plan (this option won't get you out of default until you pay the loan balance in full).
The only option to get out of default with private loans is to bring your loan current. Sometimes you can do that by requesting a deferment/forbearance. Other times you can do that by paying the monthly payments you missed.
What to do if a debt collector threatens you with jail time
Debt collectors are prohibited by law, the Fair Debt Collection Practices Act (FDCPA), from making harassing phone calls. Threatening you with jail time during a phone call is harassment.
If this happens to you, you can report the debt collector to:
- the Consumer Financial Protection Bureau
- the Federal Trade Commission
- your State Attorney General
You can also hire a law firm to sue the debt collector. The good thing about this option is that the FDCPA allows your attorney's fees to be paid by the debt collector if you win.