The Definitive Guide to Student Loans

Here’s what happens if you don’t pay your student loans

What happens when you don't pay off your debt?
What happens when you don't pay off your debt?

More than 3,000 people default on their federal student loans every day.

It takes the average student debt borrower 20 years to pay off their loans, and currently, over 44 million Americans hold a total of $1.4 trillion in student loan debt. But many borrowers don't know what actually happens if you are unable to make a payment.

First and foremost, missing a student loan payment will hurt your credit score and make it more difficult for your to borrow money in the future. But beyond credit score, the exact repercussions of failing to pay off your student loans depend on if they are held by the federal government or a private student loan company.

Federal student loans

Federal student loans are often the best choice when it comes to financing a degree in part because they offer low-interest rates and flexible repayment plans.

If you miss a payment on your federal student loans you have 270 days to make a payment before your debt goes into default. Once federal student debt is in default, the government is able to garnish your wage, your Social Security check, your federal tax refund and even your disability benefits.

The department of education often works with third-party collection agencies who will charge penalties and fees for not making a payment, sometimes as much as 18 percent of the balance of your loan.

Chris Ryan | Getty Images

The government has also been known to sue borrowers. The Department of Justice reports that in the past two years, over 3,300 student loan borrowers have been sued for defaulting. In almost every case, the borrower loses. If the government wins, they can place a lien on your home and even force a sale.

Student loan expert Heather Jarvis tells Vice that currently, "The federal government doesn't often sue, because they don't have to. But they will if they think it will get them access to other assets."

Experts predict that the federal lawsuit program will expand in the coming years under Education Secretary Betsy DeVos.

Private student loans

Private student loan companies are much less flexible than the federal government. The specific procedures for when borrowers miss a payment vary according to company policy, borrower contract and state law.

Joshua Cohen, a lawyer specializing in student-loan debt tells Business Insider, "The only remedy that a private lender has is to sue you, and they are suing you under state law and every state differs."

Private student loan companies are known for aggressively suing students for defaulting on their loans. For example, National Collegiate, the largest holder of private student loan debt in the nation, has lost a series of court cases across the country because they sued borrowers without having the proper paperwork. In these instances, millions in debt balances have been cleared.

In an email statement, New York attorney general Eric T. Schneiderman told CNBC Make It, "These reports are deeply concerning, but are unfortunately consistent with the increasingly cynical and freewheeling culture we've seen take hold of the student loan industry."

There are steps you can take to protect yourself. Avoid predatory private loan companies and for-profit colleges, and research what repayment plan works best for you.

If you've already borrowed money and are being sued by a private student debt holder, be sure to confirm that your accuser possesses all of the required paperwork. And if you think you have fallen victim to a scam, you can work with an advocate like the Predatory Lending and Consumer Protection Clinic at Harvard Law School.

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