What You Can Expect if You Don't Pay Your Student Loan Debt

Millions of Americans are saddled with crushing student loan debt and have trouble paying it when it’s due. ^[1] Ignoring student loan debt, particularly federal student loan debt, can affect almost every area of your life, including your credit score, your ability to find employment, and your emotional well-being. 

This article covers the repayment timeline for federal and private student loans and looks at the consequences of paying your loan late or missing payments. We’ll also discuss what options you have if you’re struggling to make your loan payments.

Timeline of Events if You Don't Make Your Student Loan Payments

What happens when you miss your student loan payments depends on whether you have federal or private loans. 

Repayment Timeline for Federal Student Loans

If you have direct subsidized or unsubsidized loans through the federal government, you get a six-month grace period. This starts after graduation. You don’t have to make payments on your debt during the grace period. If you have Grad PLUS or Parent PLUS loans, you (or the borrower) don’t get a grace period but you can defer your payments for these loans until six months after graduation.

Once the six-month grace period ends, you must start making payments according to your loan agreement’s repayment schedule. If you don’t elect for a different repayment plan, you’ll be placed in the Standard Repayment Plan, which has a 10-year term with fixed monthly payments. If you don’t make the payment by the due date, you’ll face consequences.

• If your payment is late by even one day... Your loan is considered delinquent. The loan will remain delinquent until you pay the past-due loan balance, plus fees.

• If your payment is 30 days late... You’ll have to pay a late fee. The late fee may be up to 6% of your late payment amount. Loan servicers charge late fees on payments more than 30 days past due. 

• If your payment is 90 or more days late... Your loan servicer will report your late payment to the three major credit bureaus, which can hurt your credit score.

• If your payment is 270 days late or more... Your loan is considered to be in default.

Repayment Timeline for Private Student Loans

The timeline for repaying private student loans differs from the timeline for federal student loans. Online lenders, banks, and credit unions fund private student loans and have different repayment terms. Private student loans generally use the following payment timeline:

• As soon as you graduate... Payment is usually due, but some private loan lenders offer grace periods.

• When your payment is one day late... Your lender marks your account delinquent and reports it to the credit bureaus, which can decrease your credit score.

• When your payment is 90 days late... The lender considers you in default and may hire a collections agency or sue you in court to collect the debt.

• When your payment is 120 days late or more... Lenders usually charge off the debt. After charging off the debt, the lender often sells it to a collections agency, which then takes over trying to collect the debt.   

Consequences of a Student Loan Default

Regardless of the type of loan, defaulting on your student loan debt can seriously damage your credit. Your loan type will influence what tools the lender has to collect on the loan and what consequences you may face.

Consequences of Defaulting on Federal Student Loans

Defaulting on federal student loans debt can have severe consequences. Because the federal government owns the loans, your loan servicer can do the following to collect payment:

• Loan acceleration – Upon default, the entire outstanding balance (not just the missed payments) becomes due, including accrued interest.

• Loss of eligibility for federal benefits – You can’t apply for federal loan relief programs such as forbearance, deferment, or income-driven repayment plans.

• Loss of eligibility for financial aid – You’re no longer eligible for more federal student aid, including grants.

• Credit reporting – The loan servicer will report your default status to credit agencies, which can lead to a bad credit score. This can make it harder to get other forms of credit, such as mortgages or car loans. You may also face higher interest rates on loans you get.

• Treasury offset – The government can keep your federal tax refund or Social Security payments and apply them to the amount owed.  

• Wage garnishment – The government can garnish your employment wages from part of your paycheck to obtain the amount owed.

• Lawsuits – The government can sue you in court, and you may have to pay attorney fees and court fees.

• Collections – The loan servicer may hire a collections agency, which will move aggressively to collect the amount owed. You’ll have to pay collections fees.

• Transcript withholding – Your college can withhold your transcripts from you so that you can’t verify your progress or transfer to another school.

Consequences of Defaulting on Private Student Loans

Private student loan lenders can’t use as many of the means to collect on defaulted loans as the federal government. Still, defaulting on private student loans can have very serious consequences, including:

• Late fees – Most private lenders charge late fees equalling around 5% of the past-due amount.

• Credit reporting – Private lenders will report your default to the credit bureaus, which can seriously harm your credit.

• Collections – The lender may sell the debt to a collection agency, which will aggressively pursue payment. Your loan agreement may also require you to pay for collection costs, including attorney’s fees and court costs.

• Lawsuits – The private lender can sue you in court. If they win, they may be able to get a court order for your employer to garnish your wages to collect the debt.  

What To Do if You Can't Make Your Student Loan Payments

If you can’t afford to pay the payments on your student loan, you need to take action immediately. Ignoring the problem will only make things worse. You may lose options for payment if you wait too long. Once your student loan is in default (at least 270 days late), you may lose some of your options, so be proactive.

Contact Your Student Loan Servicer Immediately

As soon as you think you won’t be able to make a payment, contact your loan servicer immediately to discuss your repayment options. Lenders only make money if you pay them, and most lenders lose money if the debt ends up in collections. This means lenders usually want to work with you on your student loan repayment. Tell your lender about your financial situation and see if you can work out an arrangement for repayment. 

Sign Up for an Income-Driven Repayment Plan

Federal student loan borrowers are automatically assigned to the Standard Repayment Plan (SRP) unless they choose a different plan. Because the debt is paid within 10 years, the SRP is the fastest and least expensive way to repay student loan debt. But it also has the highest monthly payment. 

The federal government has four income-driven repayment (IDR) plans that offer borrowers a more affordable payment than the 10-year Standard Repayment Plan: 

• Pay As You Earn (PAYE) – This plan allows borrowers to pay 10% of their discretionary income for 20 years.

• Repay As You Earn (REPAYE) – This plan allows borrowers to pay 10% of their discretionary income for a certain number of years. (20 years for borrowers with undergraduate student loans and 25 years for borrowers with graduate student loans.)

• Income-Based Repayment Plan (IBR) – This plan allows borrowers to pay 10% of their discretionary income for 20 years if they’re a new borrower (on or after July 1, 2014). They pay 15% of their discretionary income for 25 years if they’re not a new borrower.

• Income-Contingent Repayment Plan (ICR) – This plan allows borrowers to pay 20% of their discretionary income for 25 years, or they can pay on a 12-year repayment plan adjusted to their income.

Some borrowers will also qualify for the Income-Sensitive Repayment Plan (ISR), which allows them to make payments on Federal Family Education Loans (FFEL) Loans based on their income over 10 years. Most federal student loans borrowers are eligible for these plans. Monthly payments for these plans are often much less than payments under the Standard Repayment Plan. 

When you have paid the maximum number of payments over the repayment period for income-driven plans (either 20 or 25 years), any outstanding debt is forgiven. While this has its benefits, the IRS treats the forgiven amount as canceled debt, which is considered ordinary income for federal tax purposes. This means you’ll pay income tax on the amount that has been forgiven.

Apply for Loan Deferment or Forbearance

If you’re facing financial hardship such as high medical costs, you can apply for a deferment or forbearance on your federal student loan. Either option allows you to temporarily postpone your loan payments:

• Deferment – During the deferment period, you don’t have to make payments on the loan principal, and interest doesn’t accrue.

• Forbearance – With forbearance, you can either stop or reduce your payments for a set period, but interest does accrue, and you’ll eventually have to repay it

Remember, if your loan is already in default, you’re probably not going to be eligible for deferment or forbearance.

Get a Direct Consolidation Loan

If your federal student loan is already in default, you can apply for a direct consolidation loan (DCL). With a DCL, you either agree to repay the consolidation loan under an IDR plan, or you must make three consecutive, full, on-time monthly payments before the debt is officially consolidated. Once consolidated, the loan is no longer in default and you become eligible for other federal loan benefits and protections, such as deferment, forbearance, and loan forgiveness.

Consolidation doesn’t remove the default notice from your credit report. Also, DCL is only an option for borrowers with federal student loans. Private student loans can’t be consolidated into a DCL. 

Apply for Federal Student Loan Rehabilitation

If your federal student loan is in default, you can also agree in writing to make nine monthly payments (as determined by the loan servicer) within 20 days of their due date. This is known as student loan rehabilitation. 

You must make all nine payments within 10 months. Once you make all nine payments, your loans are no longer in default, and the default will be removed from your credit report. However, the late payments that led to the default will stay on your credit report.

Look Into Student Loan Forgiveness Programs

Student loan forgiveness programs usually require you to make loan payments for a specific period before the remaining loan amount is forgiven. Many of these programs are for people in specific career fields. For example, the Public Service Loan Forgiveness Program is for people employed in public service jobs (either for a government agency or a nonprofit organization). Participants may be eligible for federal debt forgiveness after 10 years on the job and making 10 years of student loan payments.  

See if You Can Refinance Your Student Loans

You may be able to refinance your student loans. You need to do this before your loans are in default. Once your loans are in default a lender probably won’t approve you for a loan. Although refinancing is available for both federal and private student loans, the refinanced amount will always be from a private lender. In other words, refinancing converts a federal student loan to a private loan. This means the refinanced debt is no longer eligible for income-driven repayment plans or for other federal benefits like deferment or forbearance.

For Private Student Loans...

You can generally use the strategies discussed above for federal student loans only. Private student loans have their own programs and requirements. Some private lenders may have programs for deferment/forbearance, but few offer programs that correspond to IDR plans. Private loans also don’t have loan forgiveness programs.

As soon as you think you aren’t going to be able to make your payments, contact your loan servicer to find out what options are available.

Let's Summarize...

You need to contact your lender as soon as you have problems repaying your student loan. Numerous federal student loan assistance programs will help you repay your student loans before they go into default. Federal student loans are considered delinquent after 90 days of nonpayment. Being delinquent on these loans hurts your credit score. If a loan is at least 270 days late, it’s considered in default, and the lender or loan servicer may then transfer it to a collection agency.

Private student loans may have different requirements and timelines than federal loans. Private lenders don’t have as many options to collect on loans as the federal government. Being delinquent or in default on a private student loan can seriously damage your credit.