In 2016, the internet was abuzz; a man was reportedly arrested for not paying $1,500 in student loans. The story was shared all over social media, and news stations covered it extensively, causing many people to ask, “can you go to jail for not paying student loans?”
Of course, there was more to the story. The U.S. Department of Education issued a statement saying that no, borrowers wouldn’t be arrested for their loans. It clarified that the man in question was arrested for failing to appear in court, not for falling behind on his student loan debt.
While you don’t have to worry about going to jail if you miss your student loan payments, there are other severe consequences, so it’s important to take action if you can’t afford your payments.
Your Rights If You Can’t Pay Student Loans
As a student loan borrower, you are protected by the Fair Debt Collection Practices Act (FDCPA):
- Debt collectors cannot contact you at an unusual time or place, generally meaning they can’t call you before 8:00 a.m. or after 9:00 p.m. And if you tell them they cannot contact you at work, they’re not allowed to call you there.
- Debt collectors cannot post about your debt on social media, but they can message you privately.
- Debt collectors cannot harass or threaten you.
- If the debt collector finds out that an attorney represents you, they typically must communicate solely through your lawyer.
Some states have gone a step further to protect student loan borrowers by instituting a student borrower bill of rights. A state bill of rights sets standards for how lenders and loan servicers must handle issues, ends abusive loan collection tactics, and requires lenders to be transparent about the loans they offer.
Important: With some forms of debt, creditors cannot sue you for repayment of unpaid funds once the statute of limitations has ended. But there is no statute of limitation on federal student loans. On private loans, the length of the time for the statute of limitations varies by state.
Lender Rights
Remember that lenders can take measures to recoup the money you owe them. When you applied for the loan, you signed a loan agreement which is a legally binding contract to repay it. The lender can send your account to collections, report the delinquency or default to the credit bureaus and file a lawsuit against you.
Federal student loan servicers can take severe steps like wage garnishment without a court order, but private student loan companies are more limited; they have to sue you and win a judgment against you before they can garnish your wages.
Consequences of Not Paying Student Loans
What happens if you can’t pay your student loans? The consequences of not making your payments on time can be severe:
Defaulted Loans
When loans enter default, it depends on your loan type; for federal loans, you must be at least 270 days late, while you only need to be 90 days to enter default with a private student loan.
Defaulting on your student loans is a serious issue, wrecking your credit and limiting your eligibility for other financial aid or loans. And even if you pay off the loan in full, the default will remain on your credit report for seven years.
Debt Is Sent to Collections
When you miss a certain number of payments, the lender can send your account to collections. That means the lender sells your debt to the agency, and the agency then tries to collect the money owed by contacting you. When student loans go into collections varies by loan type, but ranges from 90 to 270 days without a payment.
When you default on federal loans, the collection agency can garnish your wages and even take your tax refund through treasury offset.
If your loan is in collections, you also will be subject to collection fees. According to the Collection Bureau of America, collection fees can be 25% to 50% of the amount collected.
Your Credit Score Will Drop
Your payment history is a critical factor in determining your credit score. When you miss a payment or enter default, the lender reports that information to the credit bureaus, and your credit score will plummet. Depending on your credit profile and how late you are with your payments, your score could drop by 100 points or more.
Because student loan defaults stay on credit reports for so long, it can take several years to improve your credit score.
Options If You Can’t Pay Your Student Loans
Although you don’t have to worry about ending up in debtor’s prison if you fall behind on your student loans, the consequences of delinquency or default can be significant. If you can’t afford your payments, take these steps to prevent missed payments:
Refinance or Consolidate Your Student Loans
When you refinance your existing loans, you can choose a new loan term and potentially qualify for a lower interest rate. With those changes, student loan refinancing can give you a lower monthly payment.
Whether it makes sense to consolidate student loan debt depends on the type of loans you have and your financial situation. When you refinance federal loans, they are transferred to a private lender, so you’re no longer eligible for federal loan benefits and borrower protections.
Loan Deferment or Forbearance
If you have a major illness, lost your job or the main wage earner in your household passed away, you may be eligible for a student loan deferment or forbearance. These programs allow you to pause your payments for a limited time without entering default or the lender sending your account to collections.
Contact your loan servicer to discuss your circumstances and find out what financial hardship options are available.
Income-Driven Repayment Plans
Federal loan borrowers with unaffordable monthly payments may benefit from an income-driven repayment (IDR) plan. These plans base your payments on a percentage of your discretionary income — the difference between your income and the federal poverty guideline for your state and family size — so you could qualify for a much lower payment than you have now. You can apply for an IDR plan online at StudentAid.gov/IDR.
Consolidate With Direct Consolidation Loan
If you’ve already defaulted on your federal loans, you can get out of default by consolidating your debt with a Direct Consolidation Loan. Your existing federal student loans are combined into one, and you could qualify for a longer loan term and more repayment options than you previously had.
To qualify for Direct Consolidation after defaulting on your loans, you must make three consecutive and voluntary monthly payments on time, and you must enroll in an IDR plan.
Rehabilitation
Rehabilitation is a process for federal student loan borrowers that helps them get back on track. After defaulting on your loans, contact your loan servicer to discuss rehabilitation.
Your loan servicer will send you an agreement to sign; it says that you agree to make nine voluntary and reasonable monthly payments within 20 days of the due date, and you must make all nine payments within a 10-month period. Depending on the terms of your rehabilitation agreement, your payments could be as low as $5.
Refinance Your Student Loans With ELFI
Refinancing your debt could be a smart strategy if your payments are unaffordable or you’re having trouble keeping track of your various loans and due dates. One of the key benefits of student loan refinancing is that it simplifies your payments, and with ELFI, you can refinance to a loan with a competitive rate and a loan term as long as 20 years.
To get started, review the borrower eligibility requirements for refinancing student loans and get a quote online in minutes.
