What Happens When You Stop Paying Your Federal Student Loans?

Here's what happens when you stop paying your federal student loans

June 12, 2015

Business Insider - Two years after leaving school, students default on their federal loans at a rate of 9.1%, according to a 2013 report by the New York Federal Reserve. That figure jumps to 13.4% at the three-year mark. 

Pulitzer Prize-nominated author Lee Siegel wrote an op-ed article in The New York Times on Saturday in which he advised people to default on their student loans rather than remain stuck with crippling debt. 

But what actually happens when you default?

VICE recently talked to Heather Jarvis, a self-proclaimed student loan expert who graduated from Duke Law School with $125,000 of debt and has been an advocate for borrowers ever since.

According to Jarvis, if you decide one day to stop paying your federal student loans, after 270 days the loan will default, at which point the government will start garnishing your wages, seizing tax refunds, and intercepting government benefits (like social security) without a court order.  

The government may also sue if they think it will give them access to your assets.

"They can and do — literally do — pursue debtors to their graves," Jarvis said.

Jarvis says defaulting on your student loans can also affect your credit and hurt your chances of qualifying for mortgages and loans down the road. She does note that the government cannot put you in jail for owing debt. 

The internet is littered with stories of what happens when you can't pay your student loans, but not nearly as many about what to do after you have already defaulted.

Anna Moreno penned an article for Billfold.com in 2013 about what she did to climb out of debt after years of neglecting her student loans. She says that after two years of having the government garnish her wages, she decided to consolidate her loans, a process which she explains as "making voluntary on-time payments based on income vs. expenses for two to four consecutive months."

She adds that while this option is faster than rehabbing your loans (which involves making consecutive payments for 9 out of 10 months), your credit will not be restored and you will still owe collections fees that can increase your debt up to 25%. However, she says that after years of ignoring her debt, getting her loans out of default was not nearly as bad as she had expected it to be..

(St. Louis Fed)

"So far, it hasn’t been that bad at all. I don’t know what I was so afraid of," Moreno says. "This experience has taught me that we — myself and the roughly 6.8 million student borrowers who have found themselves in default— have options."

Jarvis recommends careful prioritization. She told VICE to make sure you pay your living expenses, like rent, transportation, food, and utilities, before your loans.

Then, when you do pay your loans, make sure you prioritize your federal loans above all other debts, because unlike other types of loans, the government only cares about your adjusted gross income and does not consider your cost of living expenses. Other lenders might be more understanding.

In any case, help is out there.

"It’s incredible to me that the hardest part about this entire process was making that first phone call and facing my poor financial decisions head-on," Moreno wrote in a follow-up article for Billfold a year after she decided to consolidate her debt. "I hope that my previous article, and this one, can show anyone in a similar situation that this whole process isn’t nearly as daunting as it seems, that things can be fixed, and that it really, really is worth the effort."

Moreno is no longer in default.