What Happens If You Can’t Pay Your Student Loans?

If you can’t pay your student loans, a federal loan becomes delinquent the day after you miss a payment and defaults at 270 days past due, at which point the government can garnish your wages, intercept your tax refund, and reduce your Social Security benefits without ever going to court. Private loans work differently: the lender has to sue you and win before it can touch your paycheck or accounts. In both cases you have options, and most of them work better the earlier you use them.

What Missing a Payment Actually Triggers

A federal student loan becomes delinquent the day after you miss a scheduled payment. If you stay behind for 270 days, the loan officially goes into default.¹ That line matters because default unlocks collection powers that simple delinquency does not.

Your servicer reports delinquencies of 90 days or more to the major credit bureaus.² So the credit damage starts well before default, and it compounds as the delinquency stretches on.

Once you cross into default, the full unpaid balance becomes due immediately. You lose eligibility for deferment, forbearance, and your choice of repayment plan. You lose access to new federal aid, including Pell Grants. Your school may withhold your transcript, and collection fees and attorney’s costs can be tacked onto the balance.¹ And federal student loan debt carries no statute of limitations. The government can pursue it indefinitely.³

Lowering Your Payment Through Income-Driven Repayment

If your income is too low to handle the standard monthly payment, an income-driven repayment (IDR) plan recalculates what you owe each month based on what you actually earn and your family size.⁴ The payment can drop to zero dollars if your income is low enough. It’s the single most important tool for a borrower who can’t keep up, and it’s underused.

What’s Available in 2026

The menu has shrunk. The Saving on a Valuable Education (SAVE) plan is no longer accepting new enrollees; federal courts enjoined it, and borrowers who were in SAVE have been placed into a general forbearance while a proposed settlement between the Department of Education and the state of Missouri works through.⁵

The One Big Beautiful Bill Act, signed July 4, 2025, eliminated Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) going forward. Income-Based Repayment (IBR) is now the primary IDR option for most borrowers, and the law dropped the old requirement that you demonstrate a partial financial hardship to enroll.⁶

Under IBR, your monthly payment is either 10% or 15% of your discretionary income, depending on when you first borrowed. Borrowers whose first loans were disbursed on or after July 1, 2014, pay 10% with a 20-year forgiveness timeline. Earlier borrowers pay 15% with a 25-year timeline. Either way, your payment is capped so it never exceeds the standard 10-year amount.⁶

One boundary to watch: borrowers who receive disbursements on new loans on or after July 1, 2026, will not have access to IBR, ICR, or PAYE.⁶ The Department of Education has issued proposed rulemaking on future repayment structures, but the details are unfinished.⁷

Applying and Recertifying

You apply through the Income-Driven Repayment Plan Request form on StudentAid.gov.⁴ It asks for your adjusted gross income, family size, and tax filing status. If you authorize the electronic transfer, the Department of Education can verify your income directly through IRS records. If your current income is much lower than your last tax return, you can submit pay stubs instead.

Once enrolled, you recertify your income and family size every year. If you consent to automatic disclosure of your tax information, your servicer handles it. If you miss the recertification deadline, your payment reverts to the standard amount, and any unpaid interest can be added to your principal balance.⁴

Pausing Payments: Deferment and Forbearance

Both deferment and forbearance let you temporarily stop making payments, but the long-term cost is not the same.

Deferment

Deferment pauses payments during qualifying events. If you have subsidized loans, the government covers the interest that accrues during deferment, so your balance doesn’t grow. Common deferment categories include unemployment (you must be actively seeking work or receiving unemployment benefits), economic hardship (including receiving public assistance like SNAP or TANF), and Peace Corps or military service.⁸ Economic hardship deferments are granted in one-year increments, up to three years total.

Forbearance

Forbearance is easier to get. You can request a general forbearance simply by telling your servicer you’re having financial difficulty, with no specific qualifying event required. The tradeoff: interest accrues on all loan types during forbearance, including subsidized loans.

The Capitalization Trap

Here’s where borrowers get hurt. When a deferment ends on an unsubsidized loan, or when any forbearance ends, the unpaid interest gets added to your principal. You then start accruing interest on a larger balance, and over a long repayment period that can add thousands to your total cost.⁹ Paying even just the monthly interest during a pause prevents the snowball. The same capitalization happens if you miss an IDR recertification or voluntarily leave an IDR plan.

What Federal Collection Looks Like

The federal government does not need to sue you to collect on a defaulted student loan. It has administrative tools that bypass the courts, and because there’s no statute of limitations, those tools stay available indefinitely.

Wage Garnishment

Administrative wage garnishment lets the Department of Education order your employer to withhold up to 15% of your disposable pay. You must receive written notice at least 30 days in advance, with your amount owed and your right to request a hearing.¹⁰ Your employer must comply once the order arrives. Requesting a hearing within the 30-day window can delay the garnishment while the matter is reviewed.

Tax Refund Offset

The Treasury Offset Program lets the government intercept federal payments owed to you and divert them to your defaulted loan. The most common target is your federal tax refund. Treasury sends a notice before the offset, but once processed, the money is gone.¹¹ If you file jointly, your spouse can file an “injured spouse” claim with the IRS to recover their share.

Social Security Offset

The government can also take a portion of Social Security benefits. The offset is capped at 15% of benefits above a protected minimum of $750 per month. That $750 floor has not been adjusted for inflation since 1996 and currently sits about $400 below the monthly poverty threshold for an individual.¹² For older borrowers living mostly on Social Security, the offset can be devastating.

Getting Out of Default

Default is serious, but it isn’t permanent. Two main paths exist to bring the loan back into good standing, and the one you pick affects your credit record and your future options.

Rehabilitation

Rehabilitation requires nine voluntary, on-time monthly payments within a period of ten consecutive months. The payment is based on what you can reasonably afford, not your original bill. The big benefit: once you complete rehabilitation, the default record is removed from your credit report. Late payments reported before the default still show, but the default itself disappears.¹³

Historically, you got only one chance at rehabilitation. The Department of Education has proposed a rule allowing a second opportunity, though that regulation has not been finalized.⁷

Consolidation

You can also exit default by consolidating your defaulted loan into a new Direct Consolidation Loan. To do it, you must either agree to repay the consolidation loan under an IDR plan, or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan first. If your wages are already being garnished, you can’t consolidate until the garnishment order is lifted.¹³

Consolidation is faster than rehabilitation, but it does not remove the default from your credit history; it just brings the loan current going forward. If you have a defaulted Direct Consolidation Loan that you need to reconsolidate, you must include at least one other eligible loan in the new consolidation. If no other eligible loan exists, rehabilitation is your only way out of that specific loan.¹³

When the Balance Can Be Erased

Certain circumstances wipe out your federal balance entirely. Each has its own eligibility rules, and some have tax consequences worth planning for.

Public Service Loan Forgiveness

If you work full-time for a qualifying employer, such as a government agency or a 501(c)(3) nonprofit, Public Service Loan Forgiveness (PSLF) cancels your remaining Direct Loan balance after 120 qualifying monthly payments. The payments don’t need to be consecutive, but each one must be made under an accepted repayment plan while you’re employed full-time by an eligible employer.¹⁴ FFEL and Perkins Loans don’t qualify on their own, but consolidating them into a Direct Consolidation Loan makes them eligible. PSLF forgiveness is not treated as taxable income under federal law.¹⁵

Total and Permanent Disability

If a physical or mental condition permanently prevents you from working, you can apply for a Total and Permanent Disability (TPD) discharge. Three types of documentation qualify: a Department of Veterans Affairs determination that you are unemployable due to a service-connected disability, a Social Security Administration disability finding, or a certification from a licensed physician.¹⁶

If you qualify through SSA documentation or a physician’s certification, there’s a three-year post-discharge monitoring period. During that time, taking out a new federal student loan reverses the discharge and reinstates the original loans. VA-based discharges skip the monitoring period.¹⁷

Closed School

If your school closes while you’re enrolled, on an approved leave of absence, or within 180 days after you withdraw, you can have the loans you took out for that program discharged. For schools that closed on or after July 1, 2023, the discharge is generally granted automatically about a year after the official closure date, and you can apply directly to get it sooner.¹⁸ If you withdrew more than 180 days before closure, you’ll need to show exceptional circumstances.

Bankruptcy

Student loans can be discharged in bankruptcy, but the bar is high. The Bankruptcy Code requires you to prove that repaying the loan would impose an “undue hardship” on you and your dependents.¹⁹ Courts generally look at whether you can maintain a minimal standard of living while repaying, whether the hardship is likely to persist for a significant portion of the repayment period, and whether you made good-faith efforts to repay before filing.²⁰ Courts weigh these factors differently, and outcomes vary. Working with a bankruptcy attorney who handles student loan cases makes a real difference here.

The Tax Hit on IDR Forgiveness

The federal tax exclusion for forgiven student loan debt under the American Rescue Plan Act expired on January 1, 2026. Any balance discharged through an IDR plan’s forgiveness timeline is now treated as taxable income by the IRS.²¹ Your servicer will issue a Form 1099-C for any canceled amount of $600 or more, and you’ll owe income tax on it for the year of forgiveness.

Not all forgiveness is taxable. PSLF forgiveness remains excluded from gross income under the Internal Revenue Code, as does forgiveness through other qualifying public-service programs.¹⁵ TPD and closed school discharges have historically been treated differently from IDR forgiveness. State income tax adds another layer; some states don’t conform to federal exclusions and may tax forgiveness the IRS does not. If you’re approaching the end of a 20- or 25-year IDR period, check your state’s treatment of canceled debt in advance so you can budget or line up something like an IRS installment agreement.

Private Student Loans Work Differently

Private lenders operate under a different rulebook. They cannot garnish your wages, seize your tax refund, or offset your Social Security benefits without first suing you and winning a court judgment. That’s the fundamental distinction from federal loans: private lenders must win a lawsuit before they can force collection.

If a private lender does obtain a judgment, collection looks like any other civil debt. The lender can pursue wage garnishment (subject to state limits), place liens on property, or levy bank accounts. The specific rules vary by state.

Private student loans also have a statute of limitations, typically three to six years in most states and as long as fifteen in a few. Once it expires, the lender loses the legal right to sue you. Be careful, though: making a payment or acknowledging the debt in writing can restart the clock in some states. Unlike federal loans, where the government can pursue you forever, time can work in your favor with private debt.

What Happens to Co-Signers

Private student loans often involve a co-signer, and missed payments damage that person’s credit and finances just as much as yours. A payment reported 30 or more days late hits both the borrower’s and the co-signer’s credit files. If the loan goes to judgment, the lender can pursue the co-signer’s wages, bank accounts, and property to the same extent it can pursue the borrower’s.

Some private lenders offer co-signer release after a set number of consecutive on-time payments, but the criteria vary and not all loans include the option. Release on the borrower’s death or permanent disability isn’t guaranteed either. Some lenders will release a co-signer on a borrower’s death with a death certificate; many don’t release co-signers when a borrower becomes permanently disabled unless state law requires it. If you’re the co-signer, monitoring the account for missed payments is the minimum step to protect your own credit.

1
Federal Student Aid. Student Loan Delinquency and Default
2
MOHELA. Credit Reporting
3
Office of the Law Revision Counsel. 20 USC 1091a – Statute of Limitations, and State Court Judgments
4
Federal Student Aid. Repayment Plans
5
Federal Student Aid. IDR Court Actions
6
Federal Student Aid. One Big Beautiful Bill Act Updates
7
U.S. Department of Education. U.S. Department of Education Issues Proposed Rule to Make Higher Education More Affordable and Simplify Student Loan Repayment
8
eCFR. 34 CFR 682.210 – Deferment
9
Nelnet – Federal Student Aid. Interest Capitalization
10
Office of the Law Revision Counsel. 20 USC 1095a – Wage Garnishment Requirement
11
Office of the Law Revision Counsel. 31 USC 3720A – Reduction of Tax Refund by Amount of Debt
12
Consumer Financial Protection Bureau. Social Security Offsets and Defaulted Student Loans
13
Federal Student Aid. Getting Out of Default
14
StudentAid.gov (via MOHELA). Public Service Loan Forgiveness
15
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
16
eCFR. 34 CFR 685.213 – Total and Permanent Disability Discharge
17
Federal Student Aid. Total and Permanent Disability Discharge
18
Federal Student Aid. Closed School Discharge
19
Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
20
Federal Student Aid. Discharge in Bankruptcy
21
Internal Revenue Service. About Form 1099-C, Cancellation of Debt