When Houston man Paul Aker was arrested by US Marshals in February 2016, his apprehension made national headlines. He claimed his arrest was due to his unpaid student loans. Well, that wasn’t quite the case. Yes, Aker owed money on student loans nearly 30 years old. But no, he wasn’t arrested because he didn’t pay off his college debt. He was arrested because he failed to appear in court at a judge’s order.
Ever since those splashy headlines appeared in print, on television, and on the Internet, the US Department of Education tried to debunk the myth that you can be arrested for not paying student loans. There are serious consequences for not paying your student loan debt, but jail time is not one of those consequences.
From Delinquent to Default
Before we dive into what happens when you don’t pay your student loans, you should understand two key terms: delinquent and default. While it is tempting to use these words interchangeably, they are very different concepts.
Once you miss a payment, your account is delinquent on the first day. If you correct this issue within 30 days, you will probably have to pay some sort of late fee, but otherwise, you’re okay. Past that point in time, your lender may report your delinquency to credit reporting bureaus.
If you’re 270 days late, your loan goes into default. And that’s when big things start to happen. The entire amount of your loan becomes due immediately. The lender may be willing to negotiate new repayment terms, or the lender may sell your loan to a debt collector who by law is allowed to add a collection fee on top of the debt. And that could just be the beginning of your problems.
According to 2017 data from the US Department of Education, 11.5 percent of students default on their student loans. This rate has been falling due to the income driven repayment plans, but it shows more than one in ten students who take out loans end up becoming more than 270 days late on their payments. These former students often wind up on modified payment plans, but they often suffer unpleasant consequences getting to those repayment plans.
Consequences for Not Paying
As we’ve mentioned, going into default on student loans is no fun. Again, your debt becomes due immediately, and you probably don’t have tens of thousands of dollars laying around. If you did, you probably wouldn’t have student loan debt!
Let’s look at the consequences of defaulting on your student loans.
A Hit to Your Credit Score
If you’ve defaulted on your student loan, you can bet your lender has already reported your delinquencies and now your default to at least one of the three major credit reporting bureaus. So if you want to make a major purchase requiring credit, prepare to be denied or to be charged a high-interest rate. It takes years to repair bad credit, so this consequence will be a long-lasting one.
Calls from a Collection Agency
When your lender becomes tired of chasing you down for payment, the lender may sell your loan to a collection agency. The collection agency pays cents on the dollar for your debt and then goes after you for the money. Federal law allows the collection agency to tack on a fee of up to 25%. Dealing with a collection agency is a hassle. Just the incessant phone calls should incentivize you to pay your student loans on time.
Whenever you don’t pay your debts, you run the risk of being sued. Student loan debt is no different. A lawsuit is much more likely with private student loans than with federal student loans. On top of paying your debt, you’ll likely owe attorney’s fees and other costs.
Your Cosigner Getting Sued
Many student loans are co-signed by the student’s parent. If you don’t pay, your cosigner is on the hook for the whole amount. You really don’t want to do that to Mom or Dad, right?
Federal student loans are subsidized by the US government, and the US government has what can seem like superpowers for getting back the money it’s owed. The federal government can garnish your wages by up to 15 percent of your take-home pay and apply it to your student loan debt.
Seizure of Your Federal Tax Refund
In addition to wage garnishment, the federal government can withhold your federal tax refund check. The bureaucratic lingo for this is “offset” because seizures of funds for student loan debt are part of the Treasury Offset Program administered by the US Department of Treasury. So if you had plans for a big screen TV with your tax refund, think again. That money could go straight back to Uncle Sam.
Even Bankruptcy Can’t Save You
With all these consequences, you’ll be tempted to throw up your hands and file for bankruptcy. That’ll get you out from under your student loan debt, right? Nope. Student loan companies have lobbied successfully to get student loans excluded from bankruptcy protection. In fact, the only way to get relief is for a judge to find you under severe economic hardship. But good luck with that. It hardly ever happens.
Getting Your Payments Back on Track
If you feel yourself starting to fall behind in your student loan payments with no viable way to catch up, the best thing you can do is contact your lender. They don’t want you to go into default, and communicating with them is the best way to explore your options.
Federal student loans have more options available to borrowers than private student loans. You may be able to consolidate your federal student loans to get a lower monthly payment, and you may also qualify for income-based repayment terms.
Private lenders are not required to offer these sorts of programs, but many do. You never know until you ask!
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.