What happens if you don't pay student loans?

HotbotBy HotBotUpdated: July 9, 2024

Introduction to Student Loans

Student loans are a common means for individuals to finance their higher education. These loans can come from federal or private sources and typically require repayment once the borrower has completed their education. Understanding the consequences of not paying student loans is crucial for anyone considering this financial option.

Immediate Consequences of Missing Payments

Grace Period Expiration

Most student loans have a grace period, usually six months after graduation or leaving school, during which payments are not required. Once this period ends, the borrower must begin making regular payments. Missing the first few payments can lead to minor penalties, but the ramifications grow more severe over time.

Late Fees and Penalties

When a borrower misses a payment, late fees are often assessed. These fees can range from a small percentage of the monthly payment to a significant additional amount, depending on the loan terms. Repeatedly missing payments can also compound these penalties, making it increasingly difficult to catch up.

Credit Score Impact

One of the most immediate and noticeable consequences of not paying student loans is the impact on your credit score. Loan servicers report missed payments to credit bureaus, which can significantly lower your credit rating. A lower credit score affects your ability to secure future loans, rent apartments, and even obtain certain jobs.

Intermediate Consequences: Delinquency and Default


A loan becomes delinquent the day after a missed payment. Federal student loans enter delinquency immediately, whereas private loans may have a grace period. Being delinquent can last for up to 270 days, during which the lender will attempt to contact the borrower to arrange payment.


If a loan is delinquent for 270 days (approximately nine months), it enters default. Defaulting on a student loan has severe consequences. For federal loans, the entire balance becomes due immediately, and the borrower loses eligibility for deferment, forbearance, and other repayment plans.

Collection Activities

Once in default, the loan is typically transferred to a collections agency. The collections process can be aggressive, involving frequent phone calls, letters, and even legal action to recover the debt. Collection fees can also be added to the loan balance, further increasing the amount owed.

Long-Term Consequences of Not Paying Student Loans

Wage Garnishment

One of the most severe consequences of defaulting on student loans is wage garnishment. The federal government can legally garnish up to 15% of your disposable income without a court order. Private lenders require a court order but can still take legal action to garnish wages.

Tax Refund Seizure

The federal government can also intercept your tax refunds to recover defaulted student loan debt. This process, known as a tax refund offset, continues until the debt is paid in full. For many borrowers, losing their tax refund can be a significant financial setback.

Social Security Benefit Reductions

For older borrowers or those receiving disability payments, defaulted student loans can lead to a reduction in Social Security benefits. The government can withhold up to 15% of Social Security checks to recover unpaid student loans.

Legal Actions and Lawsuits

Loan Servicer Lawsuits

Private lenders are more likely to file lawsuits against borrowers who fail to repay their student loans. If the lender wins the lawsuit, they can obtain a judgment allowing them to garnish wages, levy bank accounts, and place liens on property.

Statute of Limitations

Federal student loans do not have a statute of limitations, meaning the government can pursue collection indefinitely. Private student loans, however, are subject to state-specific statutes of limitations, typically ranging from 3 to 10 years. Once the statute of limitations expires, the lender cannot sue to collect the debt, although other collection activities may continue.

Options for Borrowers Struggling to Pay

Income-Driven Repayment Plans

For federal student loans, income-driven repayment plans can make payments more manageable by capping monthly payments at a percentage of the borrower's discretionary income. These plans can also extend the repayment period, which may result in loan forgiveness after 20 to 25 years.

Deferment and Forbearance

Borrowers facing temporary financial hardship may qualify for deferment or forbearance, which can temporarily pause or reduce payments. While interest may still accrue during these periods, they can provide short-term relief and prevent delinquency or default.

Loan Consolidation

Consolidating multiple federal student loans into a single Direct Consolidation Loan can simplify repayment and potentially lower monthly payments. However, consolidation may also extend the repayment period and increase the total amount of interest paid.

Loan Rehabilitation

For defaulted federal loans, loan rehabilitation can restore the loan to good standing. This process typically involves making nine on-time, voluntary payments within ten months. Successful rehabilitation removes the default status from the borrower's credit report and restores eligibility for federal benefits.

Bankruptcy and Student Loans

Discharge Through Bankruptcy

While discharging student loans through bankruptcy is challenging, it is not impossible. Borrowers must file an adversary proceeding and prove that repaying the loans would cause "undue hardship." This standard is difficult to meet, and success varies by jurisdiction and individual circumstances.

The Brunner Test

Many courts use the Brunner Test to determine undue hardship. This test requires borrowers to demonstrate three factors: that they cannot maintain a minimal standard of living if forced to repay the loans, that their financial situation is likely to persist for a significant portion of the repayment period, and that they have made good faith efforts to repay the loans.

The Psychological and Social Impact

Stress and Mental Health

The burden of unpaid student loans can lead to significant stress and mental health issues. Constant worry about finances, collection calls, and potential legal actions can contribute to anxiety, depression, and a sense of hopelessness.

Relationships and Social Life

Financial strain from unpaid student loans can also impact personal relationships and social life. Borrowers may avoid social activities due to lack of funds or feel embarrassed about their financial situation, leading to isolation and strained relationships with family and friends.

The consequences of not paying student loans are far-reaching and can affect various aspects of life, from financial stability to mental health and social relationships. Each individual's experience will vary, and understanding the potential outcomes can help borrowers make informed decisions and explore available options for managing their debt.

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