What Happens if You Default on Student Loans (It’s Not Pretty)

What happens if you don’t pay student loans? The short answer is – a lot. As soon as you miss the first payment, your student loan enters delinquency. Your loan remains in delinquency status until you make that payment. If your federal student loan continues to remain unpaid for 270 days, it enters default. Private student loans enter default when the loan remains unpaid for 120 days or after 3 missed payments.

Student loans don’t go away until they are paid off. Unlike other loans – home, vehicle, or personal – it’s exceedingly difficult to discharge student loans through bankruptcy. Struggling to find a job or not earning enough to cover the repayments are not valid excuses to stop paying student loans. Regardless of the reason, if you have student loans, you’re expected to find a way to repay them. The only exception to this is if you qualify for Public Service Loan Forgiveness.

Here’s what happens if you stop paying (or don’t pay) your student loans and they enter default status.

9 Consequences of Defaulting On Student Loans

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1. The entire loan balance will become due immediately

Once your student loan enters default – after 270 days for federal student loans and 120 days for private student loans – all other payment arrangements become invalid immediately. That means the 10-year or 20-year payment plan you had agreed to no longer holds good. Instead, the outstanding balance will become due in its entirety immediately. This includes the outstanding principal as well as the interest.

2. Your loans will be reported as delinquent to credit agencies

When your student loans go into default, your provider will report it to the credit agencies. This will get noted in your credit report, and consequently affect your credit score negatively.

Your loan payment history account has the biggest positive or negative impact on your credit score. It accounts for up to 35% of your total score. Consistent timely payments help to boost your credit score while a student loan default will lower your score by several points. Improving your score from this damage can take a long time. The longer your loans are in default, the more damage it will do to your credit score.

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3. Student loan default stays on your credit report for 7 years

Default reports stay on your credit history for up to 7 years after the outstanding has been paid. During this time, you will find it difficult to get approved for a credit card, mortgage, or auto loan. This is because lenders are reluctant to loan money to applicants with a bad mark on their record. Even if you do get approved, you will most likely pay a much higher interest on the money you borrow.

4. You’ll have to pay huge fees

Lenders impose steep late payment fees plus shockingly high interest on outstanding dues. In addition to these fees, you’ll potentially have to pay attorney fees and court costs if the lender sues you for collections. If a lender goes this route, they will sue for the entire amount of the loan.

5. Your loans may be turned over to a collection agency

Most lenders don’t chase borrowers for outstanding payments. They hand over that responsibility to collection agencies. These agencies are notorious for the tactics they use to collect overdue payments. Once a collection agency is involved, you’ll be liable for paying their fees too.

6. You may not be able to renew your professional license

When you don’t pay student loans, you risk losing any professional license you happen to hold. Even if you don’t lose your professional outright, you won’t be able to renew it. The license will become invalid after the renewal date. This can make it very difficult to find good employment even if you’re qualified and experienced for the role.

7. You’ll be ineligible to enlist in the Armed Forces

With a student loan default on your record, you’ll have to give up any dreams you have of joining the Armed Forces.

8. Your cosigner’s credit history is at risk

This only applies if you took the loan with a cosigner. When you default, it goes on both credit reports – yours and your cosigner’s. This will damage your cosigner’s credit score for no fault of theirs.

On top of all the consequences, you’ll still owe the lender the full amount that you owe. There’s no getting around that. Also, you can’t discharge student loans through bankruptcy.

9. There is no student loan statute of limitations on federal student loans

If you’re hoping to outwait the lender for the loan recovery, that may not work for federal student loans. The statute of limitations does not apply to federal student loans, which means the federal government can sue you at any time to recover the money you owe them.

It’s a little different for private student loans. The statute of limitations on private student loans is set by the individual states. This could range anywhere from 3 years to 10 years. Still, that does not mean you’ll escape all consequences or that the loan will simply go away. It simply means that the lender cannot sue you in court for the outstanding payment. However, they can try other means to collect what you owe them.

5 Additional Consequences of Defaulting on Federal Student Loans

In addition to the above, what happens if you don’t pay your federal student loans?

  1. The federal government may withhold part of your Social Security benefit payments.
  2. Your federal and state tax refunds may be withheld.
  3. You’ll be ineligible for federal repayment flexibility. That means you won’t be able to choose any of the income-based repayment plans (this option is available only as long as your loan isn’t in default).
  4. You won’t be eligible for subsidized interest benefits or any other assistance under most federal benefit programs.
  5. You won’t receive any more federal financial aid until such time that you repay the loan in full.

How To Avoid Defaulting On Student Loans

Unfortunately, thousands of student borrowers default on their loans every year. These are some of the common reasons for student loan default.

Don’t wait till you reach a point where you have no other option but to let your student loans go into default. You’ve seen how serious the consequences can be.

Use these tips to avoid getting into this dreaded scenario.

  • Explore your options before it’s too late. If you think you may have trouble paying your student loan payment, call your loan provider. Ask about forbearance, deferment, or other payment options before your account goes into default. Once your account goes into default, you’ll lose these options. Don’t wait to ask for help.
  • Try paying off your student loans early. Using any extra money you have to pay off your loans early reduces the risk of default. But there are a few downsides to this option. Understand the pros and cons of paying off student loans early.
  • Consider refinancing if your payments are too high. If you have recurring issues with making your student loan payments, consider refinancing to lower your monthly payments.
  • Set up automatic payments so you don’t miss them. When you set up auto-pay, your loan payments will be transferred from your account to your lender’s account by the specified due date. You don’t have to set due date or payment reminders. This reduces the odds of missing payments and getting into default.

What happens if you don’t pay student loans has severe consequences, which is why it’s important to stay on top of your loan payments from day one. Get more tips on how to prevent student loan default.

College Raptor’s Student Loan Finder tool can help you quickly find and compare loans from reputed lenders, making it easier to identify the lowest-cost loan for you.

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