Do your student loans feel like a financial black hole? Your payments disappear as fast as you make them, and your balance never seems to go down.
But no matter how much student loans have tripped up your finances, defaulting would only make the situation worse. If you were to stop paying your federal or private student loans, a number of bad consequences would follow.
Read on to learn what would happen if you stopped paying your student loans — plus what steps you can take instead.
1. Student loan default could destroy your credit score
If you stopped paying your student loans, your credit score would plummet. That’s because your credit score is based on on-time debt repayment, among other factors. “The negative credit impact of a default can be quite severe,” student loan lawyer Adam Minsky said.
Although a credit score might not feel important just out of college, it has a big effect on your life. For instance, a low credit score makes it difficult to get a credit card. You might not be able to take out another loan, such as a car loan or mortgage. Renting an apartment could be tough, too, because many landlords request credit checks.
“In some states, a student loan default can jeopardize professional licensure,” Minsky said. “Negative credit reporting can have secondary effects including difficulty obtaining housing or employment.”
Before defaulting on your loans, consider the consequences on your credit score. Not only will a poor credit score make life difficult, but it will also take years to build back up.
2. Debt collectors will start calling
Student loans are considered delinquent the day you miss a payment. With federal student loans, you have 270 days to get back on track before your loans are considered to be in default. Private loans, however, typically go into default after 90 days. Some even go into default the day you miss a payment.
When your student loans are in default, debt collectors will start calling. They might even call your friends, family, and workplace to track you down. Although the Fair Debt Collection Practices Act protects you from undue harassment from both private and federal student debt collectors, these collectors can still go to great lengths to get a hold of you.
The process for getting out of default depends on whether you have federal or private student loans. For federal loans, you’ll need to rehabilitate or consolidate your federal student loans. You could end up paying fees up to 16% of your original balance. Plus, you’ll have to pay back all the extra interest that has accrued.
If you’re facing private student loan default, you’ll need to speak with the lender about your options. Some offer programs to help you get out of debt, but others do not. You might need to negotiate with a collector to settle your debt. If you believe there’s been an error, disputing the debt in court is also an option.
Whether you have federal or private student loans, getting out of default is a difficult and stressful process.
3. The government could garnish your wages or Social Security check
The government has wide-reaching powers when it comes to debt collection. If you stop paying your federal student loans, the government could actually take payments straight from your paycheck. Plus, it could cut into your Social Security benefits.
A court could order your employer to withhold up to 15% of your pay. The government will keep garnishing your wages until you’ve repaid your debt.
If you’re nearing retirement, the government could also take 15% of your Social Security check. In 2015, about 114,000 Americans had their Social Security benefits garnished, according to a report from the U.S. Government Accountability Office.
“The federal government has powerful collection tools that allow them to forcibly collect from borrowers,” Minsky said. In effect, you might not be able to stop paying your student loans even if you want to.
Note that private lenders can’t garnish your wages or Social Security benefits. Only federal student loan default can lead to wage garnishment.
4. You might lose your tax refund
Beyond cutting into your wages and Social Security benefits, the government can also offset your federal tax refund. Instead of getting money back in the spring, you’ll be out of a refund.
Some states also allow guaranty agencies to seize your state income tax refund if you’ve defaulted on Federal Family Education Loans.
Before any offset occurs, you will be notified. That way, you can take steps to set up a repayment plan, get out of default, and save your refund.
Again, only federal student loan default can have this consequence. Private student loan lenders can’t come after your federal tax refund.
5. Your co-signer will also get in trouble
If you have private student loans, you probably have a parent or other family member as a co-signer. Private lenders typically don’t approve loans to students without the financial guarantee of a co-signer.
Co-signers agree to be equally responsible for your student debt. So if you stop paying, your co-signer will also suffer the consequences. Debt collectors will start calling them, plus your co-signer’s credit score will take a hit.
6. You could end up in court
In some cases, student loan borrowers who default end up in court. The government doesn’t often sue borrowers, as it has the power to garnish wages and tax refunds. But it can bring you to court as a last resort.
Private lenders are more likely to resort to lawsuits. “Private lenders don’t have the same powers to force collections as the federal government,” Minsky said. “Thus, most private lenders must file a lawsuit against a defaulted borrower — and prevail by obtaining a judgment — in order to seize money or assets.”
Private student loans have a statute of limitations, which varies by state. After the statute is over, lenders can’t take legal action against you. But before it closes, they can sue you for what you owe.
If you need a student loan lawyer, this process can further aggravate your debt.
7. Your student loan debt will just keep growing
Ignoring your student loans won’t make them go away. In fact, your student loans will just keep growing due to interest.
The longer you forget about your debt, the bigger it will grow over the years. If your student loans feel insurmountable now, it will only get worse if you default.
Instead of delaying the inevitable, you’re better off taking action on your student loans today.
Explore other options before you stop paying your student loans
Even if you’re struggling to make ends meet, you do have options when it comes to your student loans. To avoid default, consider one of these three options for managing your student loan debt.
Get on an income-driven repayment plan. If you have federal student loans, an income-driven plan will reduce your payments according to your income. You will never have to pay more than 10% to 20% of your discretionary income each month.
Request deferment or forbearance. Both of these approaches pause your student loan payments temporarily while you get back on your feet. The government offers deferment and forbearance to federal student loan borrowers. Some private lenders also have these programs, so speak with your lender about your options if you have private student loans.
Consider a career that qualifies for loan forgiveness. There are a number of loan forgiveness and repayment assistance programs throughout the country. You’ll get help toward your student loans in exchange for service in a designated area or organization. Some programs offer assistance for both private and federal student loans, while others only help repay federal student loans.
As you can see, your approach will differ depending on whether you have federal or private student loans. Either way, speak with your loan servicer about repayment plans. And double-check their advice with a trusted source. By thoroughly understanding all your options, you can avoid default and the serious consequences that come with it.