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What Happens if You Don’t Pay Student Loans?

With student loan payments restarting soon, you may be curious about what happens if you can’t afford them.

Justin Cupler

Contributing Writer at Tally

July 11, 2022

After payments and interest rates were frozen for the past few years, federal student loan payments will restart in September 2022. This means you should start reviewing your budget and ensuring you have the means to cover this payment you haven’t had to worry about since March 2020.

While there can be consequences for missing student loan payments, federal student loans that fall into default can be cured. Below, we’ll cover:

  • The risks of not paying student loans

  • What fees and penalties you can expect

  • How to repair federal loans in default

What happens if you don’t pay student loans?

As with any debt, there are financial repercussions if you miss student loan payments. However, the penalty for missed payments will differ based on the type of loan you have, i.e., federal student loan or private student loan.

Federal student loans

Because they’re connected to the federal government, missed federal student loans often have more severe penalties. However, the federal government-backed loans also include some leeways that private loans may offer.

Late fees

Federal student loans give borrowers a bit of a cushion before the loan servicers take action for being late, which starts with the late fee. 

Federal student loan servicers won’t impose the standard 6% late fee on your account until a payment is 30 days late. So, if you have a $100 monthly federal student loan payment 30 days past its due date, you could incur a $6 late fee.

Late payment will be reported to the credit bureaus

At the 90-day mark, the student loan servicer can report your delinquency to the three major credit bureaus: Experian, Equifax and TransUnion. 

This will result in a 90-day late payment appearing on your credit report, which can negatively mark your credit score and impact your ability to secure loans and credit cards for up to the next seven years.

Federal student loan default

The final stage in federal student loan delinquency is default. Under the federal direct loan program or the Federal Family Education Loan (FFEL) program, default doesn’t occur until the student loan is at least 270 days late.

If your loans are through the federal Perkins loan program, the loan holder can consider you in default if you fail to make your payment by the due date — even if you’re only one day late.

While federal student loan default has serious consequences, it is solvable. Immediately contact your loan servicer to ask what solutions can bring them current. Often, servicers can put you on a temporary repayment plan, and if you satisfy that plan, your loans will return to an on-time status.

If you allow the loan to remain in default, the consequences can include:

  • Disqualification from obtaining future federal student loans and other federal student aid

  • The balance of the loan, including interest, could be immediately due in full

  • Disqualification from forbearance, deferment and other repayment plans

  • Garnishment of income tax refund checks and other federal benefits payments

  • Wage garnishment

  • The loan servicer or lender may sue you for default, and you may be responsible for all costs associated with collecting the debt

  • Your school may withhold your official transcript

Private student loans

Since the U.S. Department of Education doesn’t back private student loans, private lenders have policies regarding delinquency. 

Late fees

Each private student loan lender has its own terms for applying late fees. Some may charge a fee if you’re only one day late, whereas others may give you a short grace period before hitting you with a fee.

Late payments will be reported to the credit bureaus

If a payment is 30 days late past its due date, the lender can submit a notice of the 30-day delinquency to the three credit bureaus. This can make it difficult for you to obtain credit cards or other loans for the next seven years.

You will continue getting late payment marks on your credit report at each 30-day point — 60 days, 90 days, 180 days, etc. — until you bring the account current. Each 30-day period has a more significant negative impact than the previous.

Debt will be sent to collections

Private student loan providers will only allow your debt to become so far past due before sending it to a third-party collector. Third-party debt collectors either:

  • Work on behalf of the student loan provider

  • Purchase the charged-off account from the lender

Each lender will have a different process for collecting.

When your debt goes into collections, there are a few things to expect. First, the collection agency will send you a letter and begin calling to collect the debt. You’ll also see the collection account on your credit report, which will likely accompany an unwelcome credit score decrease. 

Since some of these collection agencies buy the debt for far less than you owe, they may offer you a settlement for less than the original debt. In some cases, you can even negotiate a pay-for-delete, meaning you settle the account and the agency agrees to delete all collection records from your credit report. 

Your lender could sue you

After being in default for a long period and following many failed collections attempts, the private lender or third-party collections company could attempt to sue you or your loan co-signer for the unpaid balance. In court, a judge could rule in favor of the lender or collection agency, permitting a garnishment of your wages or liquidating your assets to satisfy the unpaid loan balance.

How can you amend defaulted federal student loans?

If your federal student loans default, it’s not time to give up. Two primary options to restore your student loan debt are loan rehabilitation and loan consolidation.


Loan rehabilitation

Loan rehabilitation is the longer pathway toward restoring your defaulted federal student loans, but it has some added benefits.

To rehabilitate a direct loan or FFEL program loan, you must agree in writing to submit nine monthly payments within 20 days of the agreed-upon due dates. Your loan servicer will deem what is reasonable and affordable. 

These reasonable payments will follow a specific formula that’s 15% of your annual discretionary income divided by 12 (for the months in a year). 

In this case, your discretionary income is the amount of your adjusted gross income from your most recent tax return that exceeds 150% of the federal poverty guidelines in your state.

To rehabilitate a Perkins Loan, you must make the full monthly payments within 20 days of the monthly payment due date for nine consecutive months. The lender will determine the amount of the monthly payments necessary to satisfy the requirements. With loan rehabilitation, you’ll regain all the benefits your student loans had before, including eligibility for:

  • Deferment 

  • Forbearance

  • Repayment plan options

  • Student loan forgiveness programs

On top of that, the loan servicer will wipe the record of default from your credit report, though the previously missed payment marks will remain for up to seven years.

Loan consolidation

The alternative to loan rehabilitation is consolidating the defaulted loan into a direct consolidation loan (DCL). To do this, you must agree to either:

The lender will determine the payment amounts in the latter option.

If your loan is being repaid under wage garnishment, you must have the garnishment order lifted or the judgment vacated before applying for consolidation.

Like loan rehabilitation, you’ll regain all the financial aid benefits and repayment options available before the default after completing the consolidation. However, unlike loan rehabilitation, the record of the default will remain on your credit report and impact your credit rating for up to seven years.

Full repayment

The final option to cure a defaulted federal student loan is full repayment. This means satisfying the entire loan balance, including all interest and fees. However, this usually isn’t an option for most defaulted borrowers because of their financial situation.

Not paying students loans has a lasting impact

What happens if you don’t pay student loans? Personal finance risks for not paying the bill range from a simple late fee to a negative mark on your credit report or wage garnishment. Plus, the negative marks on your credit report for missed payments or a loan default could follow you for years.

While private student loans offer no standardized curing process (even if some lenders may offer ways to cure defaulted loans), federal student loans do. So, if you fall into student loan default, you can agree to bring the loans current and, in some cases, wipe the default from your credit report.

Paying your student loan bills on time is one step you can take to ensure a healthy financial future. For more personal finance tips delivered to your inbox, sign up for the Tally† newsletter today.

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