If you never pay your student loans, interest will keep accruing, and, at some point, your loan will default. Once you default on your loans, they will be sent from your loan servicer to a collection agency. This can have a serious impact on your credit score, finances, and future.
If you’re thinking about a strategic default or avoiding monthly payments until you feel more financially secure, think again. Here’s what happens if you don’t pay on student loans.
Disclaimer: While I do recommend some products with affiliate links in this post, they’re ones I’ve seen work over years of experience as a student loan lawyer. I started this business to help a friend, and I’ll treat you with the same respect.
The consequences of unpaid loans
If you don’t pay your student loans, many negative consequences may follow, depending on your individual circumstances.
Here is a list of what can happen if you don’t pay student loans:
- You may accrue substantial late fees.
- Interest will continue to accrue, increasing your total debt.
- The government may garnish your wages for federal loans.
- You could risk income tax refund offset or Social Security garnishment.
- Your credit score may tank, making it harder to borrow loans in the future — like car loans, credit cards, and mortgages.
- If you do secure a loan with low credit, your interest rate will likely be higher than average.
- You may lose certain loan benefits, such as the ability to defer student loan payment.
- Eligibility for additional student financial aid may vanish if you’re in default.
- Student loan lenders or collections agencies may sue you.
- You may receive endless phone calls bothering you about paying off your debt.
- Your professional license may be suspended for some vocations.
- In severe cases, the federal government may sue you, win, and then place a lien on your property.
- If you have a cosigner, many of these consequences can happen to them as well.
This list of adverse effects is worth considering. The penalties for unpaid student loans can affect many different aspects of your life and cause serious financial and emotional strain.
Can you go to jail for not paying student loans? No, you cannot go to jail for not paying student loans — federal or private. Debtor’s prison is no longer a thing in the US. However, in severe cases, if you are sued, you can be arrested for failing to comply with a court order.
3 factors that affect unpaid student loans
The exact consequences of your student loans vary from case to case. The 3 determining factors for what happens if you don’t pay student loans are:
- The type of student loans you have. Federal student and private student loans can have different consequences for borrowers in default.
- Whether or not you have a cosigner. For loans with a cosigned, consequences of not paying can affect them as well.
- Any applicable statute of limitations. Federal student loans don't have a statute of limitations; private student loans do.
If you’re behind on payments, you’re not alone. A 2017 study showed that 1 in 5 student loan borrowers was behind by 90 days or more — a number that has likely increased since then.
For borrowers in default, it’s vital to know the consequences of continuing without payment and what your options are from here. Let’s break down the differences in penalties between the 2 categories of student loans: federal and private.
What happens when you don't pay your federal student loans?
When you don’t pay your federal student loans, late fees occur, interest continues to accumulate, and you risk a bad credit score. As soon as you miss a payment plus the grace period, your loan becomes delinquent.
You have 90 days before your student loan servicer will report delinquency to the major credit bureaus. Once there, those late payments are difficult to get removed from your credit report.
After 270 days, your loan will go into default. When that happens, late fees will be added to your credit report. Defaulting can take a tremendous toll on your credit rating.
Do student loans go away after 7 years? No, your student loans don’t go away after 7 years. However, missed payments and defaulted status disappear from your credit score after 7 years.
Can you walk away from student loans? You can “walk away” from private student loans in rare cases by running out the statute of limitations, which is different in each state (typically 3-20 years). Also, it is difficult to figure out which state’s statute applies to a loan. While possible, this is not advisable. Even if you leave the country with unpaid student loans, your debts are still due.
What happens if I default on my student loans? If you default on your federal student loans, depending on your loan type (Direct Loan or FFEL Loan), your loan servicer will send your loans to the Default Resolution Group or a guarantor like Trellis or ECMC.
From there, the DRG will likely send your loans to a private debt collection agency. That agency is who you will then need to work with. Collection agencies are irritating. You will need to go over your student loan repayment options for getting out of default with these agencies.
Options for defaulted federal student loans
If you’re delinquent or in default on your federal student loans, don’t panic. You have several avenues available to you.
For most federal student loan borrowers in default, repayment options will include:
- Negotiating a settlement
- Entering into the loan rehabilitation program
- Applying for loan consolidation
Federal student loan settlements aren't cheap. They'll demand about 85-90% of the current balance, though they waive the collection fees. The rehabilitation program can be a great option, but it will require several on-time payments and can only be used once.
Due to the high cost of settling, most people get out of student loan default through the loan rehabilitation program or a Direct Consolidation Loan. It’s important to consider whether to rehabilitate or consolidate in your individual situation, as well as qualifying factors.
What happens when you don't pay your private student loans?
When you don’t pay your private student loans, your student loan servicer will probably offer you different repayment plans (like Navient's Interest Rate Repayment Plan).
In rare cases, they may ask if you want a deferment or forbearance. At a certain point, both of those options are no longer effective.
The student loan payments you make under an “interest rate only” repayment plan don’t contribute toward your loan balance. In fact, you usually end up owing more than when you started. Sooner or later, you'll run out of deferments and forbearances.
Unlike federal loans, your private student loan will usually go into default after only 120 days of non-payment. However, this time period varies for each lender.
Options for defaulted private loans
Depending on how much student debt you have, you may not be able to find a lender willing to help. Your delinquent or defaulted loans have probably tanked your credit score, making it difficult to refinance your loans.
If refinancing is impossible, and you can't afford monthly payments, you have 3 options:
- Try to negotiate a student loan settlement.
- File bankruptcy on your student loans.
- Simply stop paying and wait to be sued.
Is negotiating a private student loan settlement possible? Absolutely. Is it guaranteed? Absolutely not.
The same is true of filing bankruptcy on your student loans. Can you do it? Sure. Will you get rid of your loans in bankruptcy? Maybe.
Can you fight student loans in court? Yes, you can fight student loans in court. If you file for Chapter 7 or 13 bankruptcy, you can file for an adversary hearing, and a court will hear your case. If you prove undue hardship caused by student loan debt, the court may discharge your loan.
If a private loan company sues you, you can also fight that in court. I recommend hiring a student loan lawyer to represent your interests.
When you can't afford the student loan payments and the loan servicer isn't working with you despite your financial hardship, I suggest hiring a student loan attorney.
COVID-19 update to student loans
When the coronavirus pandemic hit the US, Congress passed the CARES Act.
The federal government’s measures benefited federal student loan borrowers by:
- Suspending monthly payments
- Stopping interest from accruing
- Halting wage garnishment
- Pausing tax refund offsets
- Stopping collecting on student loan debt
- Giving borrowers continued credit towards the student loan forgiveness programs they were pursuing, like Public Service Loan Forgiveness
These benefits are currently set to expire on September 31, 2021, unless extended by the federal government.
While these measures provide relief to some borrowers, they don’t impact everyone with student loans. It’s important to note that none of the above benefits apply to:
- Private student loans
- Federal Perkins Loans not owned by DOE
- Non-defaulted FFEL Program loans not owned by DOE
- Non-defaulted HEAL loans
The Department of Education does not have legal authority over private student loans. Use your Federal Student Aid ID to check studentaid.gov and see who owns your loans. If it’s the DOE, you get to reap the above benefits until September 31.
Want to know more about loan forgiveness? Check out this video.
Can’t pay? Let’s talk.
If you’re struggling to pay your student loans, you have options. These consequences are serious, but they don’t have to dictate your future. Sign up for my newsletter to learn more about how to deal with student loans.
If you’re in default and read to take action, schedule a free talk with me today to discuss your situation in detail. Together, we can get real results so you can say goodbye to debt.