What Really Happens When You Don't Pay Your Student Loans

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Student loan figures are staggering, and as the amount borrowed rises, so too do defaults. Failing to pay your student loan can cause serious fallout. Unlike other types of debt, student loans cannot be discharged during bankruptcy. Defaulting is nothing to be taken lightly.

According to Student Loan Hero, college students across the country are graduating with an average $37,172 in student loan debt. And overall, Americans owe around $1.48 trillion in student loans. Unfortunately, 11 percent of the 44 million student loan borrowers have a loan in default.

Student loan default defined

How long can you miss payments before you're classified as in default? The answer depends on who's done the lending.

• The Federal Student Aid Office defines a default on a Direct Loan or Federal Family Funded Educational Loan as failure to pay in more than 270 days (nine months).

• For private student loans, the definition of a default is stricter. You're usually considered in default if you've missed payments for three months, but some lenders brand you in default after just one missed payment.

Your loan could also be automatically categorized as in default if you or your co-signer dies or files for bankruptcy, no matter whether you're making timely payments or not. (See also: 6 Questions to Ask Before Taking Out Student Loans)

What can happen if your student loan defaults?

Student loans are among the most dangerous debt available in our society today. I say dangerous because there are few options to extricate yourself from a student loan if you fall on hard times. Mind you, federally subsidized loans offer multiple options for forbearance or deferment, which is a plus. But some private loans only permit a 12-month reprieve over the life of the loan. (See also: 4 Things You Need to Know About Deferring Student Loans)

If you can't get a forbearance or still find yourself unable to pay after a deferment, and you end up in default, brace for some significant financial consequences.

Wage garnishment

Student loan collection agencies can legally garnish your wages without a lawsuit. And they can take not only the amount that was initially due, but also penalties that can dramatically balloon your outstanding debt. Now you've also got to worry about overdrawing your bank account, exacerbating the financial stresses that caused you to stop paying your student loan in the first place.

Ineligibility for repayment assistance

Once you're in default, your options for help begin to narrow. You'll be ineligible for repayment assistance programs, meaning you can no longer apply for a deferment or forbearance. Gradual payment plans will be off limits.

Suspended license

In 22 states, including my home state of Illinois, professional licenses or your driver's license can be suspended if you fail to make student loan payments and the loan defaults. It will be much more difficult to earn an income without your professional certification or driver's license.

Credit issues

Obviously, not paying your student loans will implode your credit. Some basic financial transactions, from getting a cellphone plan to qualifying for a mortgage, will be more expensive and difficult. It could take months or years to rebuild your credit record.

Tax refunds seized

Your tax refund can be withheld to satisfy the outstanding balance on defaulted student loans. Federal benefits like Social Security can also be garnished.

You can't outrun your debt

Student loans don't just go away if you ignore them. They are difficult to discharge and federal government collection agencies have tremendous legal authority to take your funds if you neglect to keep your payments current.

Some Americans dodge their student loan obligations by relocating overseas. This is not a solution. Late fees, penalties, and interest continue to accrue, and if life changes and you ever decide to repatriate, the problems will only be worse.

Avoiding student loan default status

The best defense against student loan default is to be proactive. Contact your student loan servicer as soon as your payment troubles begin. Inquire about payment assistance options available to borrowers experiencing difficulty repaying. (See also: 8 Surprising Ways to Pay Off Your Student Loans)

Avoiding the problem with your student loan is the absolute worst plan of action. In general, student loan borrowers who are struggling with their payments should consider:

• Requesting a forbearance or deferment.

• Modifying the loan through The Direct Loan Consolidation program.

• Refinancing to a nonprofit student loan program to lower the interest rate.

• Revising the terms of the loan repayment.

• Applying to discharge the student loan.

You do have options, but you've got to recognize the problem before you default. Take action early and you can head off a lot of the issues that can turn your inability to pay into a disaster with long-running consequences.

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