What to Expect If You Refuse to Pay Your Student Debt

Here’s your friendly reminder to actually listen to Gen Z and Millenials. When they said they weren’t paying back their student loans, they meant that. Nearly nine million debtors missed their first payment last October when the post-pandemic pause came to an end. And believe it or not, some 20 and 30-somethings aren’t planning to make a payment—like ever. Considering seemingly never-ending inflation, a lousy housing market, and skyrocketed interest rates, paying back student loans isn’t feasible for many. But there are others with an unwavering, nonchalant stance on repayment, too: Why penny-pitch your lifestyle and take on extra jobs and side hustles to pay back your debt when you can, like, not care?

The student debt strike is tempting

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 $42,000—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 $24,000, 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 are keeping their pocket change to themselves, among other reasons.

Student loan borrower Noella Williams from Brooklyn, New York, is a recent graduate who is $30,000 in debt. As of right now, she has no plans to pay off her balance, as any disposable income will be put toward life experiences like traveling or dining. “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.

But the student debt strike consequences are serious

Even though there are legitimate reasons for not paying your debt, you still should pay it. Like, yes, we’re all mad at the Supreme Court for blocking President Biden’s loan forgiveness plan, 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 to expect if you avoid your payments.

Increasing tuition costs, high-interest rates, and the cost-of-living crisis are why millennials and Zers are keeping their pocket change to themselves.

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 your 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. 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 can contact your employer and request 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, worker’s compensation, and insurance payouts are also subject to this.

Court appearances, late fees, suspended license… 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 in delinquency. Owing the government thousands of dollars (and refusing to pay them back) can suddenly mean that you can’t treat patients, teach kindergartens, 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.

Farrington advises all financially uncomfortable borrowers to apply for an income-based repayment (IDR) plan. “Your student loan payment can be very low—even $0 a month,” if you legally don’t have the funds, he says. There are four income-driven payment options to choose from—which we are explaining ahead in detail. 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.

It can feel hard enough to make ends meet sometimes, but that doesn’t mean we should make it any harder on ourselves by striking our debt.

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.

Deferment

For those suffering through extreme financial hardship like a layoff or housing instability, skip the repayment plan and apply for a deferment. A deferment is a pause on your student loans that can last up to three years. During this time, interest isn’t accrued on subsidized loans (public loans based on financial need), but it is on unsubsidized loans (public loans not based on financial need).

To request a deferment, 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.

Final thoughts

No one wants to pay their student loans, least of all me, but a student debt strike 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 striking our debt. With all the repayment options available, there is no reason why you can’t find a plan (and a payment amount) that works for you and your current situation—and one that won’t force you to compromise your whole lifestyle.

While I wait for my finances to stabilize, I can be at ease knowing that the IRS is not gunning for me because I set up a deferment for my student debt, and that’s a sigh of relief. Until then, I’m hoping that maybe President Biden’s student loan forgiveness plan might work after all.

Here’s What Actually Happens If You Refuse to Pay Your Student Loans