Published in: Student Loans | Oct. 26, 2019

How Long Can Unpaid Student Loans Haunt You?

By:  Dana George

We are committed to full transparency as part of our mission to make the world smarter, happier, & richer. You should know that offers on The Ascent may be from our partners - it's how we make money. That transparency to you is core to our editorial integrity, which isn’t influenced by compensation.

You know what's scarier than Halloween season? Unpaid student loans and the impact they have on your credit.

Shortly after graduate school, my husband took a job in northwestern Iowa. One of the first couples we befriended were two of the coolest people we'd ever met. He was a pilot, and she was a smart, sophisticated, private school grad from the East Coast. We bonded by being out-of-towners in an area that rarely welcomed new faces. 

About a year into the friendship, they mentioned that they were purchasing the ranch on which they lived. We were a little surprised, having believed that they already owned the property. They seemed so successful and were quite a bit older than us. At some point during the loan process, the wife confided to me that they were having trouble securing a mortgage. They had both walked away from their student loans decades earlier and were now considered a high lending risk. 

What I remember about that conversation was how incensed my friend was. "Can you believe they won't just let that go?"

Um, yeah. I never got the impression that lenders were the forgiving types.

person wearing a sheet as a ghost costume for Halloween.

Image source: Getty Images

What if I just ignore my student debt?

Tempted to ignore the haunting truth of student loan debt? Not so fast. Like a baddie in a Wes Craven movie, student loans have a way of coming back to life. There is no statute of limitations on how long a lender can haunt you for payment on your student loans. You owe the money. And the amount you owe accumulates interest and penalties when it's not being paid.

The consequences of unpaid student loans can be harsh -- scary, even. Student loans show up on credit reports by the big three credit reporting companies. Each student loan appears as its own tradeline, which shows the loan's origination date, the amount owed, the last date the debt was reported, the reporting company, and the payment history.

Unpaid student loans are like giant cobwebs, and pretty much anything you do financially can get tangled up in them. Each and every missed, late, or partial payment shows up on your credit report. And a defaulted payment or a county court judgement will remain on your record for years.

That's the same credit report used to determine whether you qualify for a credit card, auto loan, or mortgage. It's the same report a landlord uses to determine whether he or she should rent to you. It can even become a dark specter as you search for a job. Your student loan lender has the right to sue you for the full amount to garnish your wages. In addition, federal loan lenders can take up to 15% of your monthly social security payments, or take money off the top of your social security disability payments, unless you've been granted a disability discharge. 

Will a default stay with me forever?

Defaulted student loans don't always stay on your record forever. Normally, defaulted private student loan debt will fall off your credit report seven and a half years after the date of the first missed payment. Defaulted federal student loans either fall off seven years after the date of default, or seven years after the date the loan was transferred from the Federal Family Education Loan Program (FFEL) to the Department of Education.

But, and I cannot stress this enough, this is not a get out of jail free card. You still owe that money and if, for example, the student loan is transferred, it will reappear on your credit report. Not to mention that you can still be taken to court and chased by debt collectors.

And if you've taken out a Federal Perkins Loan -- a need-based student loan from the Department of Education -- that puppy can follow you for darn near forever. It will not budge from your credit report as long as there is a balance due. The only way to exorcise a Perkins Loan (and in truth, any loan) is to pay it off or consolidate it. I can only surmise that our friends from Iowa had the misfortune of carrying Perkins loans, and will possibly carry them to their graves. 

Enter the debt-fighting hero

Every scary story has a hero, right? And in this one, the hero is you. You can deal fearlessly with student loans, even as the payments peck away at your budget like a scene from The Birds. Here are some weapons at your disposal:

  • Get in touch with your loan servicer. Rather than skip payments or walk away, let your servicer know that you can't make your payments. Ask about repayment options that will help you stay in good standing. It may be that you make interest-only payments until you get on your feet. Or, if you have loans with several servicers, you might be able to consolidate them all into one lower-interest loan. 
  • If it's federal loans that are keeping you awake at night, look into an income-driven repayment plan. This plan uses your income to determine how much you can afford to pay each month and caps your payments at 10% to 20% of discretionary income. It may lower your payment enough to give you some breathing room.
  • If you're unable to nail down a full-time job, are called into active-duty military service, or are seriously ill, consider filing for student loan deferment. It's as easy as completing a form and submitting it to you lender, a task that can normally be completed online. Your balance may accrue interest during the deferment period, but it's far better than defaulting on the loan. 
  • Private student loan issuers are not obligated to defer or in any way help you modify your loan. It is, however, in their best interest to do so. They would rather receive some payment than know you're going to default. It's certainly worth a phone call.

Yes, you can walk away from your student loans and in some cases, the default will fall off your credit report in seven years. They'd be gone, but not forgotten. Consider this: Like the scariest clown to ever haunt your dreams, a former lender can pop up to grab your tax refund before it reaches your bank. 

Do you really want to go through the rest of your life looking over your shoulder? Or find you can't get a mortgage in 20 years time? It's not worth it -- especially when there are options available now to help you manage your debt.

Save thousands on student loan interest

Many people are missing out on lower student loan interest rates because they don't take the time to research their refinancing options. Our picks of the best student loan providers can help you save thousands of dollars in interest over time. Click here to uncover the best-in-class student loans providers we could find in 2019.