What Happens if I Don’t Pay My Student Loans?

Student loan default happens when you don't pay back your loans in a certain time period, and it can affect tax benefits, financial aid eligibility, and even your wages.
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Updated on July 14, 2023
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  • A loan default happens after you have not paid back your student loans for some time. The amount of time and how many payments you can miss without penalty depends on the student loan you have.
  • If you default on a loan, you may lose tax benefits, wages, and financial aid eligibility. Your credit score may drop, and you could be charged high loan collection fees.
  • The Department of Education says a borrower should never pay a company to help them out of student loan default.

Student loan debt is one of the biggest financial crises in the U.S. And as higher education becomes more expensive, more and more people are calling for these loans to be forgiven.

Since the U.S. Supreme Court struck down President Joe Biden's loan forgiveness program, which would have forgiven up to $20,000 in debt for most student loan borrowers, people have considered not paying back their loans in protest.

BestColleges reported student loan interest will begin accumulating again in September, with monthly payments restarting in October.

The White House announced that it will not mark past-due loans as delinquent or in default for the first 12 months after the pause on payments lifts. Interest will continue to accrue on loans, but borrowers will not be penalized for missing payments from Oct. 1, 2023, to Sept. 30, 2024.

But what happens if you don't pay back your loans?

In the summer of 2022, New America gathered 47 student loan borrowers from across the country who had defaulted on their loans before the COVID-19 pandemic. They were put into focus groups to discover why they had defaulted and how it affected their lives.

New America said that some borrowers felt crushed that they couldn't save money for their children, and others felt underprepared for any unexpected expenses.

What Happens When I Don't Pay Loans?

According to Credit Karma, a loan default occurs when a borrower fails to make one or more payments for a certain amount of time.

According to the Department of Education (ED), as soon as someone misses the first payment on a student loan, the loan becomes past due, or delinquent. A loan is out of delinquency once the borrower pays it. If the borrower fails to pay within 90 days, the loan servicer reports to the three major credit bureaus (sometimes called consumer reporting agencies). Continued delinquency can result in default.

ED says the timeframe for when a loan goes from delinquency to default depends on the loan. William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program loans, for example, will default after a borrower fails to make a payment for at least 270 days.

Federal Perkins Loan Program loans servicers, on the other hand, can declare loan default after just one missed payment.

ED recommends borrowers contact the organization that notified them of the default as soon as possible to explain their situation and organize a way out of default.

What Happens if I Default?

A Borrower's Wages, Federal Tax Refunds, and Benefits Can Be Withheld

If a borrower defaults on the loan, the entire balance becomes immediately due. ED says that once this happens, the loan holder can begin collecting on your loan by taking money from your wages or from federal payments like tax refunds.

Defaulting can limit benefits including the child tax credit, earned income tax credit, and Social Security.

"I wasn't expecting it, and I have kids," one borrower who had their tax refund withheld told New America. "That big chunk that you get every year [in tax refunds] is a big help to take care of your household. And when I had $5,000 or $6,000 taken away from me … it hurt."

The borrower continued, "At that point you don't have the option of whether you're going to pay it this month or if something is more pressing, you need something at the house, or your car breaks down or whatever, it doesn't matter. They're taking it, regardless."

A Borrower Can Face High Collection Fees

According to ED, collection fees are expenses on federal student loans that are added to the outstanding balance of the loan.

One borrower told New America those fees were the amount of the payments. So the payments weren't going toward the actual loan, just the fees.

Half of borrowers who default are charged collection fees, and over 80% said they felt that those fees damage their finances, according to the July 2022 New America brief analyzing data on student loan default.

A Borrower's Credit Score Can Be Damaged

This was the most prevalent consequence from loan defaults. Damaged credit scores can limit quality-of-life purchases like homes and vehicles, and, in some states, limit job prospects.

"The credit score damage is the worst," said one borrower to New America. "It affects every aspect of adulthood. Home ownership has been difficult because of my student loans, even though I'm repaying them."

Borrowers Are No Longer Eligible for Federal Financial Aid to Return to School

New America reported that about a third of borrowers in default could not gain more financial aid for school. Its focus group participants felt this barrier locks them out of gaining an education to escape financial struggle.

"I wanted to get a college degree. I wanted to become a sociologist ..." said one borrower. "So, when I wound up in default, it was basically the end of that dream. While I was in default … I couldn't return to school and finish my degree that I was so close to getting because I wasn't able to receive further financial aid or loans at the time."

Other Consequences of Loan Default

  • Borrowers lose benefits and protections they had pre-default, such as income-driven repayment (IDR) plans and payment pauses.
  • Borrowers' professional licenses can be suspended or canceled in certain states.
  • The student loan balance grows because interest continues to accrue, which is not common for defaulting on other types of loans.

How Do I Get Out of Student Loan Default?

According to New America, there are five ways to exit default:

  • Full loan payoff: Paying all loan-associated fees all at once or over time — either voluntarily or involuntarily through garnishments (wage withholding).
  • Rehabilitation: An agreement where a borrower has 10 months to make nine payments as low as $5 a month. This can typically only be used once and can remove default from a borrower's credit history.
  • Consolidation: Borrowers can consolidate all loans into one new good-standing loan and enroll in an IDR payment plan or make three payments. It can typically only be used once and does not remove a default from the credit history.
  • Settlement agreements: A rare agreement where borrowers can negotiate to close out a loan.
  • Discharge or cancellation: Borrowers can either have their loans discharged or canceled.

Do NOT pay for help with a defaulted loan: ED says the Default Resolution Group can help borrowers exit default for free. Borrowers should never work with a company asking to pay enrollment, subscription, or maintenance fees to help them out of default.