Making student loan payments on top of a pile of other bills is difficult for many people. As a result, more than one million student loan borrowers go into default every year.
Furthermore, a study by the Federal Reserve found nearly one in five student loan recipients were at least 90 days behind on payments.
Here are 14 specific consequences that can stem from failing to pay student loans.
Late Payment Consequences – There are two main repercussions of late payments.
1. Late Fees
If you’re 30 days late on federal student loans, you’ll typically encounter a late fee of up to 6 percent of the amount you owe. So if you owed $350, you may have to pay up to $21 extra on top of your existing student loan payment.
Private student loans have similar late fees but aren’t standardized. In this scenario, you’ll either pay a predetermined percentage or a flat fee, whichever is higher.
2. Lower Credit Score
After 30 days, a lender can report the issue to credit bureaus, which can adversely affect your credit score. This can impact your life in several ways, including making it more difficult to qualify for credit cards, buy a car and get a mortgage.
And if you are approved, you’re likely to experience higher interest rates.
Loan Default Consequences – Once a federal student loan payment is 270 days late, it officially enters default. For private student loans that time is shorter at 120 days. When this happens, the repercussions escalate, and it can affect you in several ways.
3. Lose Loan Benefits
You’re no longer eligible for deferments or forbearances once you default. You’ll also no longer be able to choose your repayment plan and may have to shift to an income-driven repayment plan instead. In turn, this limits your repayment flexibility moving forward.
4. Wage Garnishment
With wage garnishment, a lender can withhold up to 15 percent of each paycheck to collect on your student loan. They can continue to do so until your student loan has been paid in full or you remove it from default.
5. Negatively Impact Credit
We already mentioned that late payments can hurt your credit score. But going into default only worsens the issue and can send your credit score plummeting even further. Even if you had good credit beforehand, it can bring you down into the “poor” range.
6. Withhold Your Tax Refund
In some cases of federal student loan default, the government may take your tax refund. Some states also have laws in place where state guaranty agencies are allowed to take your state income tax refunds as well. This can be a considerable financial blow if you depend heavily on your tax refund.
7. Cosigner is Impacted
A cosigner is equally responsible for the repayment of a student loan. If you default, the lender will turn to your cosigner, and they’ll have to begin making payments.
It can also negatively impact the cosigner’s credit, and they may find it more difficult to qualify for future loans or refinance existing ones.
8. Social Security Payments Garnished
On top of that, defaulting can adversely affect your retirement plan, at least for federal student loans. Known as Social Security garnishment, the government can take up to 15 percent of your Social Security benefit. While this doesn’t apply to private student loans, this is something you should definitely be aware of for federal student loans.
9. Lien on a Property
There are also situations where the government will sue for defaulting on a federal student loan. “In almost every case, the borrower loses,” explains CNBC reporter Abigail Hess. “If the government wins, they can place a lien on your home and even force a sale.” Whenever a lien is placed on your property, you’re not legally allowed to sell, refinance or transfer ownership. In order to clear up the title, you must first pay off the lien.
10. Lose Eligibility for Additional Financial Aid
Besides that, you won’t be eligible for further federal student aid once you go into default. This often means your educational pursuits will be put on hold, and you must get out of default in order to receive aid again.
11. Suspend Your Professional License
While this won’t apply to everyone, there are 13 states that could revoke your professional license if you default on your student loan as of April 2019. Nurses, teachers, therapists and electricians are just a few examples of careers that require a professional license.
This creates a Catch-22 where you’re unable to work, which further increases the difficulty of repaying.
12. Suspend Your Driver’s License
Two states — Iowa and South Dakota — can even suspend your driver’s license if you default. Needless to say, this makes it more difficult to get to and from work, which creates further issues earning a paycheck to repay student loans.
13. Loans Go To Collections
Another potential consequence is having your debt sent to a collection agency, who will charge additional fees when attempting to recoup the money. They usually add up to 25 percent more than what you owed initially on your principal, which only compounds the problem and puts you deeper in debt.
14. You Could Be Arrested
You can’t be sent directly to jail for not repaying your student loans. However, you may end up facing a lawsuit for unpaid debt. And if you fail to show up for your court date, this can result in an arrest. While the concept of “debtors’ prisons” is illegal and no longer exists, some people do end up being incarcerated after defaulting.
Do This Now:
You definitely don’t want to find yourself in a situation where you’re behind on your student loans. If you are struggling to make student loan payments, call your provider to see what options are available.
For federal loans, you may qualify for an income-based repayment plan or a temporary deferment (if unemployed or facing an economic hardship).
For private student loans, consider refinancing your loans, which could potentially offer a lower interest rate. This means you’ll pay less interest and could lower your monthly payment.