Remember when Gen Z and Millennials said they weren’t planning to pay their student loans? Well, they weren’t joking. There are more than 9 million borrowers who aren’t up-to-date on their payments, according to the Education Department. Considering seemingly never-ending inflation (thank you, tariffs), a lousy housing and job market, and higher-than-ever interest rates, paying back student loans isn’t feasible for many. But there are others with an unwavering, nonchalant stance on repayment, too: Why pay back your debt when you can, like, not care?
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Up until recent news broke that collections will resume in May on defaulted loans, affecting nearly 25% of borrowers, some 20 and 30-somethings thought they’d get out scot free. But now? Well, the repercussions of not paying back the government can’t be as easily ignored. This is purely an annoyance for the borrowers who hoped to “stick it to the man,” but for the borrowers who quite literally can’t afford their payments, it’s about to become a serious financial hurdle.
We spent some time interviewing student debt strikers and finance experts alike to understand the full picture, and ahead, we’re sharing what we learned. From the real reasons behind borrowers not paying their loans to the legal consequences and loan repayment options for even the lowest income earners, we’ve got you covered.
In this article 1 Wanting to keep your money to yourself is understandable 2 But the consequences of not paying your loans are serious 3 So what are our options? 4 Should you continue your student loan debt strike?
Wanting to keep your money to yourself is understandable
Gen Zers and millennials aren’t withholding their money because they don’t want to pay their loans. Most don’t have the money—it’s really that simple. Millennials shoulder almost half of the country’s student loan debt, with the average borrower owing $40,000—an amount most can’t pay if they want a solid savings account, a house, or a well-funded retirement. Gen Z is in the same boat, too, with a current balance of $23,000, except they are predicted to own the highest amount of loans compared to both millennials and Gen X. Increasing tuition costs, high-interest rates, and the cost-of-living crisis are why millennials and Zers want to keep their pocket change to themselves, among other reasons.
Student loan borrower Noella Williams from Brooklyn, New York, graduated with nearly $30,000 in debt. Since graduation, she’s been putting any disposable income she has toward life experiences like traveling or dining, ignoring her loans. “It’s a struggle to survive right now,” she says. “So, it is not a priority for me to pay these loans. I am giving away the little bit of money I have to treat myself with.” Fair enough, Williams. The problem? Defaulting on her loans means she might not have a choice. The government’s plan to receive payments with or without the borrower’s approval is about to is about to burst her, and many other’s, bubbles.
But the consequences of not paying your loans are serious
Even though there are legitimate reasons for not paying your debt, you still should pay it. Like, yes, we’re all mad the Supreme Court didn’t green light forgiveness when Biden was in office, which could have helped millions of borrowers in financial relief. And, yes, interest rates are diabolical and the main reason why it’s nearly impossible to make a dent in your loans. All of that is true, but none of it stops the consequences from coming your way.
Millennial financial advisor Robert Farrington says, “Not paying your student loans is one of the worst financial decisions that you can make… There are many repercussions, and some are indirect that can cost you more than what your student loan payment would have been.” With that said, here are a few things you can expect to happen very soon if you’ve been avoiding your payments.
Lowered credit score
I know you don’t need me to tell you this (or maybe you could use the reminder!), but credit scores are important. Not only are they used for home ownership or financing a car, but a low credit score can inhibit your ability to rent an apartment and get insurance, according to Farrington. So, that luxury apartment you’ve been eyeing? No realtor will rent it to you with a less-than-favorable credit report.
The same goes for your utilities and your cell phone—your bills will almost double in price because you’re now considered a “predatory lender” (AKA you don’t pay back your debt). And you probably can’t get any credit cards, either. Mainstream banks like Bank of America and Chase will either offer you cards with low spending power or turn you away completely.
Government offsets
Your credit is the least of your worries. If a payment isn’t made within 270 days, you officially enter default, and the big guys—the federal government—get involved. “You’ll automatically be subject to government offsets of your tax refunds and other government payments,” Farrington says. That means the Treasury Offset Program—a sub-department of the Treasury Department tasked with rounding up defaulters—and the IRS will be calling you.
Any tax refund will automatically become the government’s property unless you challenge the notion. Disputing the tax offset could work, but only if you didn’t pay your student loans through no fault of your own (i.e., loans are not in default, the loan balance is incorrect, you’re in bankruptcy, etc.). But even then, you’ll need sufficient evidence, like a bankruptcy filing or bank statements showing a zero loan balance, to prove why you didn’t make any payments.
Wage garnishments
Bad credit is ehh, tax offsets are bad, but wage garnishment? Now, that’s the worst of them all, and it’s coming to bite defaulted loan borrowers. Wage garnishment is when your earnings are legally taken away as compensation for an unpaid debt. For example, once you’ve entered default, your student loan provider, or the government, can contact your employer and request up to 15 percent of your paycheck for owed payments. This means that if you take home $5,000 a month, 15 percent of that ($750) will be taken to pay your loans before it even hits your account. Your social security benefits, workers’ compensation, and insurance payouts are also subject to this.
Based on the Education Department’s press release, wage garnishments won’t start until later this summer. The FSA is beginning to send defaulted loan borrowers information explaining their options for preventing wage garnishments—including making payments, rehabilitating their loans, and more.
Court appearances, late fees, suspended licenses… and more
Your loan provider is going to get their money, even if they have to sue you for it. Private lenders (think banks and credit unions) can’t seize your assets or garnish your wages without a court order, so they will have to file a lawsuit to receive compensation for delinquency. And public lenders (i.e., the government), on the other hand, don’t need a court order to receive compensation for defaulted student loans. Basically, the government can legally garnish your wages or take your tax offset without prior court approval, whereas private lenders can not.
In addition to lawsuits, various late fees can be added to your balance, including collection costs that charge 25 percent of your overall loan amount. If your total debt is $35,000, a 25 percent collection cost is $8,750. Ouch.
Finally, your medical, teaching, and driving licenses are at risk when you’re delinquent. Owing the government thousands of dollars (and refusing to pay them back) can suddenly mean that you can’t treat patients, teach kindergarteno, or operate a vehicle.
So what are our options?
It’s easy to tell borrowers to pay their student loans, but the issue is more complicated than that, obviously. As someone who can’t afford their student loan payments, I understand the anxiety of not wanting your credit ruined or your wages garnished because you don’t earn enough to afford an additional $100 expense. But defaulting on your loan is not and has never been the answer. Here are some alternatives to consider:
Income-Driven Repayment Plans
Farrington advises all financially uncomfortable borrowers (who are not already in default) to apply for one of four income-driven repayment (IDR) plans. “Your student loan payment can be very low—even $0 a month,” if you legally don’t have the funds, he says. As you explore these options, keep in mind that eligibility for each plan is based on the types of federal student loans you have. To find out which plans you are eligible for based on your loan type and to apply for an IDR plan, you can visit the income-driven repayment plan page on the Federal Student Aid website.
SAVE Plan
The Saving on a Valuable Education (SAVE) Plan takes your family size and discretionary income (the money left over from taxes and necessities like rent and food) to calculate your monthly payment. It also has an interest benefit, unlike other income-based repayment options. For example, if $50 in interest accumulates each month and you have a $30 scheduled payment, the remaining $20 will not be charged once you make your monthly payment on time. The government would cover the remaining $20 to prevent your balance from growing, making this a great option for low-income borrowers trying to pay down their loans quickly.
PAYE Plan
Similar to other income-based payment options, the Pay As You Earn (PAYE) Plan takes your income into account when calculating your minimum monthly payment. Monthly payments under PAYE will be 10 percent of your disposable income and will increase (or decrease) as your income fluctuates. And after 20 years of repayment, your loans will automatically be forgiven if there’s still a balance. Just a warning: Any forgiven balances will be taxed as your income.
IBR Plan
With the Income-Based Repayment (IBR) Plan, your payments are based on 15 percent (10 percent if you are a new borrower on or after July 1, 2014) of your discretionary income. Similar to the SAVE Plan, you will get a lower payment with IBR if your federal student loan debt is high compared to your income and family size. If your loans are not paid off in full after you make payments for 20 or 25 years, they will be forgiven.
ICR Plan
The Income-Contingent Repayment (ICR) Plan takes 20 percent of your discretionary income—or the minimum amount of a 12-year payment plan—to calculate your monthly payment. Similar to the other plans, your monthly amount changes as your income fluctuates with ICR. However, in some cases, your payment can be higher than the amount you would have to pay under the 10-year Standard Repayment Plan, so keep that in mind when looking into this plan.
Loan Rehabilitation or Consolidation
Unforutnately, IDR plans are not available to loan borrowers who are already in default. However, loan rehabilitation and consolidation are two methods of getting your student loan out of default and out of the pesky hands of wage garnishers. Loan rehabilitation typically looks like making a certain number of consecutive, on-time payments to your loan holder under a rehabilitation agreement. Loan consolidation, on the other hand, consists of consolidating your defaulted federal student loan into a Direct Consolidation Loan. Once you do this, you would either need to agree to paying your loan through an IDR or make three consecutive, voluntary, on-time, full monthly payments.
Deferment or Forbearance
For those suffering through extreme financial hardship, like a layoff or housing instability, apply for a deferment or forbearance. These can temporarily pause your student loan payments. However, keep in mind that depending on your loan type, interest may continue to accrue during this time, which can make for a larger balance in the long run.
To request a deferment or forbearance, go through your loan provider or the Federal Student Aid’s website (if you need to reset your password because it’s been that long—you’re not alone). All you have to do is identify your provider if you don’t know what yours is already, set up an account, and request a deferment through their online portal.
Should you continue your student loan debt strike?
No one wants to pay their student loans, least of all me, but defaulting your loans is a recipe for financial trouble. As someone who applied for deferment, I understand that it can feel hard enough to make ends meet sometimes, but that doesn’t mean we should make it any harder on ourselves by ignoring our debt. With all the repayment options available, as well as the options for those who are already in default, there is no reason why you can’t find a a way that works for you and your current situation—and one that won’t force you to compromise your whole lifestyle.