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!