What Happens If You Don’t Pay Your Student Loans? (2024)

Student loan debt is one of the biggest issues impacting Americans' lives today. As of 2023 Q1, the Federal Reserve Bank of St. Louis reported outstanding student loan debt in the United States totaled $1.77 trillion.

You may be tempted to simply ignore your debt, but this is a very bad idea with serious consequences. In most respects, defaulting on a student loan has exactly the same consequences as failing to pay off a credit card. However, in one key respect, it can be much worse. That is, should the government take action to get what it's owed.

Most student loans are guaranteed by the federal government, and the feds have powers about which debt collectors can only dream.

Please note: President Biden announced a new income-driven repayment (IDR) plan on June 30, 2023. It offers enhanced financial benefits to student loan borrowers. Three important features launched during the summer of 2023, while the full regulations take effect on July 1, 2024. Read on to learn more.

Key Takeaways

  • You may be able to use federal student loan assistance programs to help you repay your debt before it goes into default.
  • Let your lender know that you may have problems repaying your student loan.
  • Failing to pay your student loan within 90 days classifies the debt as delinquent, which means your credit rating will take a hit.
  • After 270 days, the student loan is in default and may then be transferred to a collection agency.
  • Keeping up with your student loan payments helps improve your credit score.

First, You’re Considered Delinquent

When your loan payment is 90 days overdue, it is officially delinquent. That fact is reported to all three major credit bureaus. Your credit rating will take a hit.

That means any new applications for credit may be denied or given only at the higher interest rates available to risky borrowers.A bad credit rating can follow you in other ways. Potential employers often check the credit ratings of applicants and can use them as a measure of your character.

Cellphone service providers also check credit ratings. They may deny you the service contract you want. Utility companies may demand a security deposit from customers they don’t consider creditworthy. A prospective landlord might reject your application.

The Supreme Court ruled on June 30, 2023 that the Biden administration lacked the authority to cancel up to $20,000 of federal student debt per borrower. This put an end to the student loan forgiveness that President Biden originally announced back in Aug. 2022, which had been in legal limbo since Nov. 11, 2022.

The three-year forbearance on student loan payments and interest that began back in 2020 ended this year. Student loans began accruing interest on Sept. 1, while required payments restarted in October.

The Account Is in Default

When your payment is 270 days late, it is officially in default. The financial institution to which you owe the money refers your account to a collection agency. The agency will do its best to make you pay, short of actions that are prohibited by the Fair Debt Collection Practices Act (FDCPA). Debt collectors also may tack on fees to cover the cost of collecting the money.

It may be years down the road before the federal government gets involved, but when it does, its powers are considerable. It can seize your tax refund and apply it to your outstanding debt. It can garnish your paycheck, meaning it will contact your employer and arrange for a portion of your salary to be sent directly to the government.

What You Can Do

These dire consequences can be avoided, but you need to act before your loan is in default. Several federal programs are designed to help, and they are open to all who have federal student loans, such as Stafford or Grad PLUS loans, although not to parents who borrowed for their children.

Three similar programs, called Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving on a Valuable Education (SAVE), reduce loan payments to an affordable level based on the applicant’s income and family size. The government may even contribute part of the interest on the loan and will forgive any remaining debt after you make your payments over a period of years.

The balance is indeed forgiven, but only after 20 to 25 years of payments. The payments may be reduced to zero, but only while the indebted person has a very low income.

The Public Service Loan Forgiveness Programis designed specifically for people who work in public service jobs, either for the government or a nonprofit organization. People who participate may be eligible for federal debt forgiveness after 10 years on the job and 10 years of payments.

Details of these federal programs are available online,as is information about eligibility.It is important to remember that none of these programs are available to people whose student loans have gone into default.

A good first step is to contact your lender as soon as you realize you may have trouble keeping up with your payments. The lender may be able to work with you on a more doable repayment plan or steer you toward one of the federal programs.

The New SAVE Program

On June 30, 2023, President Biden announced a new income-driven repayment (IDR) plan called SAVE. It offers student loan borrowers new and improved benefits, such as forgiving a student loan with an original principal amount of $12,000 or less after 10 years of payment (rather than the previous 20 to 25 years).

SAVE will replace the existing REPAYE plan. Those already enrolled in REPAYE will be enrolled in SAVE automatically. The full slate of SAVE regulations goes into effect on July 1, 2024. However, during the summer of 2023, three significant features went live:

  • The amount of a borrower’s income protected from payments will rise to 225% of the federal poverty guidelines from 150%. So, a single borrower earning less than $32,805 annually ($67,500 for family of four) will have no payments. Those loan holders who don’t meet this threshold will save at least $1,000 per year.
  • Interest charges not covered by a borrower’s monthly payments will be halted so that no unpaid interest can increase the amount a borrower owes.
  • Married borrowers who file taxes separately won’t have to include a spouse’s income in the calculation of their payment amounts.

For more information about SAVE, see the Department of Education’s fact sheet.

One Upside

There is an upside to student debt.If you keep up your payments, it will improve your credit score. That solid credit history can be crucial for a young adult trying to secure that first car loan or home mortgage.

Worst-Case Scenario

A true worst-case scenario involved a man who found armed U.S. marshals on his doorstep. He had borrowed money 29 years earlier and failed to repay the loan. The government finally sued. According to the U.S. Marshals Service, several attempts to serve him with a court order failed. Contacted by phone in 2012, he refused to appear in court.

A judge issued an arrest warrant for him that year, citing his refusal to appear. When the marshals finally confronted him outside his home, he told CNN, “[I] went inside to get my gun because I didn’t know who these guys were.”

That’s how you end up facing an armed posse of U.S. marshals, with local police as backup, for failure to pay a student loan of $1,500. For the record, the man said he thought he paid the debt, didn’t know about the arrest warrant, and didn't remember the phone call.

However, even this sorry story has a reasonably happy ending. Hauled into court at last, the man agreed to begin paying off his ancient student loan, plus accrued interest, at the rate of $200 a month. After 29 years of interest, the $1,500 debt had grown to around$5,700.

Do Student Loans Go Away After 7 Years?

Typically after seven years, defaulted student loans are removed from your credit report, like all defaulted loans. This primarily applies to private student loans. Note that this isn't a reason to not pay your student loans because you still owe the debt. And if the debt is transferred, it may show up on your credit report again.

Can Unpaid Student Loans Result in Your House Being Taken?

No, unpaid student loans do not result in your property being seized. Student loans are unsecured so they do not have any collateral that can be seized legally. A private lender, such as a bank, would have to sue you and win to be able to seize your assets. For federal loans, your wages can be garnished or your tax refunds withheld.

Do Mortgage Lenders Look at Student Loans?

Yes, they do. When assessing your creditworthiness, mortgage lenders will look at all of your outstanding debt, including student loans.

The Bottom Line

The government and banks have an excellent reason for working with people who are having trouble paying off their student loans. You can be sure that they are as anxious to receive your loan payments as you are to repay your debt.

Just make sure that you alert the appropriate parties as soon as you see potential repayment trouble ahead. Ignoring the problem will only make it worse.

What Happens If You Don’t Pay Your Student Loans? (2024)

FAQs

What Happens If You Don’t Pay Your Student Loans? ›

If you default on your student loan, that status will be reported to national credit reporting agencies. This reporting may damage your credit rating and future borrowing ability. Also, the government can collect on your loans by taking funds from your wages, tax refunds, and other government payments.

What happens if you never pay your student loans? ›

The default is reported to credit bureaus, damaging your credit rating and affecting your ability to buy a car or house or to get a credit card. It may take years to reestablish a good credit record. You may not be able to purchase or sell assets such as real estate.

Is it a crime to not pay student loans? ›

No, you can't go to jail for not paying your student loans. So if that was a fear you had, take a deep breath—no one is coming to arrest you if you miss a payment. But like we mentioned, you can be sued over defaulted student loans. This would be a civil case—not a criminal one.

Will unpaid student loans ever go away? ›

Do student loans go away after 7 years? While negative information about your student loans may disappear from your credit reports after seven years, the student loans will remain on your credit reports — and in your life — until you pay them off.

Can you lose your house if you don't pay student loans? ›

When you fall behind on payments, there's no property for the lender to take. The bank has to sue you and get an order from a judge before taking any of your property. Student loans are unsecured loans. As a result, student loans can't take your house if you make your payments on time.

What if I can't afford my student loan payments? ›

Get Temporary Relief: Deferment or Forbearance

A deferment or forbearance allows you to temporarily stop making your federal student loan payments or temporarily reduce your monthly payment amount. This may help you avoid default. Note: Interest accrues during forbearances and some deferments.

What are 3 effects of not paying back student loans? ›

If you default on your student loan, that status will be reported to national credit reporting agencies. This reporting may damage your credit rating and future borrowing ability. Also, the government can collect on your loans by taking funds from your wages, tax refunds, and other government payments.

At what age do student loans get written off? ›

There is no specific age when students get their loans written off in the United States, but federal undergraduate loans are forgiven after 20 years, and federal graduate school loans are forgiven after 25 years.

What is the 7 year rule for student loans? ›

In most cases, the Fair Credit Reporting Act (FCRA) allows derogatory items like defaulted debts or collection accounts to stay on your credit report for up to seven years. Because federal student loans do not have a statute of limitations, these negative accounts can remain on your credit report indefinitely.

Do unpaid student loans affect your credit? ›

The most important thing you can do to maintain healthy credit is make sure you're paying your bills on time — student loans are no exception. Even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years.

Why did my student loans disappear? ›

Student loans disappear from credit reports 7.5 years from the date they are paid in full, charged-off, or entered default. Education debt can reappear if you dig out of default with consolidation or loan rehabilitation. Student loans can have an outsized impact on your credit score.

Is there a way to avoid paying student loans? ›

Options to Get Out of Repaying Student Loans Legally
  1. Loan Forgiveness Programs. ...
  2. Income-Driven Repayment Plans. ...
  3. Disability Discharge. ...
  4. Temporary Relief: Deferment or Forbearance. ...
  5. Student Loan Refinancing. ...
  6. Filing for Bankruptcy: A Last Resort.

What happens if I take out a student loan and don't use it? ›

You can return unused federal student loans within 120 days to avoid paying interest. However, if your unused student loans are private, you will probably have to pay interest.

Do student loans ever get written off? ›

There is no specific age when students get their loans written off in the United States, but federal undergraduate loans are forgiven after 20 years, and federal graduate school loans are forgiven after 25 years.

What happens if you never earn enough to repay student loans? ›

If you stop working, or start to earn below the repayment threshold, your repayments will stop until you earn over the threshold. You'll make a repayment if you go over the weekly or monthly threshold at any point during the year, for example, if you get a bonus or work overtime.

What happens to student loan money you don't use? ›

Sometimes, students borrow more in student loans than they need to fund their education. Students in this situation may wonder “what happens if I don't use all of my student loans?” In most cases, colleges will refund the money to the student.

What percentage of people don't pay back student loans? ›

Key Points. The average federal student loan debt held as of the second quarter of 2024 is $37,853. Black Americans hold an average (median) of $26,000 in student loan debt, while white Americans have $25,000. Sixteen percent of Americans with student loans are behind on their payments.

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