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You might be wondering if you can go to jail for student loans. The short answer is: it depends.
The longer answer is that while many people think they can go to jail for student loan debt, that’s not actually the case. Most of the time, you won’t go to jail for student loans. However, there are some cases where you could end up in prison—and those cases tend to involve criminal activity (like fraud) or failure to pay a court order requiring you to pay your student loans.
So let’s take a look at how these scenarios might play out in real life and what you should do if you’re afraid of going to jail over your student loans.
When you are in debt it can be stressful and a horrible experience. You might even worry about being sent to jail for not paying your debts. Despite this, it is usually not the case. With most debts, you cannot go to jail because you are past due on credit card debt or student loan debt. The only time you can go to jail for not paying your debt is due to not paying taxes or child support.
In some cases, you can go to jail for debt. This is only if you have not paid your taxes or if you have not continued to pay your child support payment. This is because if you deliberately do not pay your taxes, then the government believes you should go to jail. The only time that this can happen, is if you have been charged and convicted of this crime.
Tax crimes include filing a fraudulent tax return or not filing a return at all, but if you simply cannot pay, the government will not put you into prison.
Another instance where you can be put into jail for debt is if you do not pay your child support. This is because the government believes that you should be able to support your children or at least attempt to. Federal law states that you can be sentenced to as much as six months or two years in prison for not paying child support.
You cannot be arrested or placed in jail for not paying student loan debt, but it can become overwhelming. Student loan debts are considered “civil” debts, which are in the same category as credit card debt and medical bills. Because of this, they cannot send you to jail for not paying them.
what happens if you never pay off your student loans
Loans are considered delinquent immediately after one missed payment, but your lender or loan servicer might not report you as late to the major credit bureaus until you’re 90 days past due. Here’s what can happen the longer you don’t pay your student loans:
- Default. After several months of missed payments, your loan will enter default. The specific timing and consequences of default vary by lender. In extreme cases, the entirety of your student loan balance immediately comes due.
- Lost eligibility for future aid. If you’re currently in default, you could lose out on any future student aid, including scholarships, grants and federal student loans. Defaulted loans on your credit report could also make it harder to buy a home, buy a car or take out a credit card.
- Credit score drop. The longer you go without paying your student loans, the more your credit score may tank.
- Potential lawsuits. Your original lender could sell your loan to a debt collection agency, which can call and send you letters in an attempt to collect a debt. To garnish wages, lenders will need to go through court. You could get sued if you don’t repay your loans.
should i not pay off my student loans
Should I Pay Off My Student Loans?
The reprieve on federal loan repayment began back in March 2020 as a feature of the CARES Act. It temporarily set interest rates to 0% and suspended loan payments and collections on all federal student loans through Sept. 30, 2020. (This FAQ on the website explains how the current, automatically granted payment suspension works and which loans are eligible.)
As the pandemic intensified and unemployment numbers rose, the Department of Education extended student loan payment through the end of 2020, and then again through Sept. 30, 2021. As that deadline loomed, however, the DOE said it would issue a final extension through Jan. 31, 2022.
The DOE’s action provides some much-needed relief to those who’ve lost their income in the current pandemic. But if you’re in the fortunate position of still being able to make regular loan payments, what should you do with the money? Should you keep paying your student loans, even though no payment is due?
The Pros of Continuing Your Payments
If you continue to make your regular payments while interest is not accruing, your payments will be applied directly to the principal balance. (Tip: Be sure to clarify your intention to apply the full payment to principal with your loan servicer.)
This will provide a big leg up when it comes to repaying that loan—not only will you possibly be able to retire the loan ahead of schedule, you will end up paying a lot less interest over the life of the loan. (Also, per the studentaid.gov website, any loan repayments made during the suspension-of-payments period can likely be refunded if need be; contact your loan servicer for more information.)
But though there are clear advantages to continuing to pay your student loan, doing so may not be the best use of the extra cash in your budget. It’s a concept in finance called return on investment: Carefully consider all of the things you could do with that money in your budget right now.
Is There a Better Use of the Money?
Let’s run through some ideas to get the best bang for those student-loan payment dollars, depending on your own financial situation.
1. Save An Emergency Fund
If you don’t have an emergency fund, set aside a few months’ worth of would-be student loan payments to create one.
As my colleague Christine Benz explains, emergency funds are crucial, regardless of life stage or situation. If there’s one thing 2020 taught us, it’s to expect the unexpected. Whether it’s a home repair, out-of-pocket medical expense, or job joss, having a substantial cash cushion on hand will save you from needing to finance big expenses with high-interest credit cards or loans from retirement accounts. And, as Benz advises, keep in mind that the greater your fixed expenses and the harder your job would be to replace (because it’s specialized and/or higher-paying), the larger your emergency fund needs to be.
2. Start a Debt-Repayment Plan
There are two well-known debt-paydown strategies, the “snowball” and the “avalanche.” They both require that you pay at least the minimum due on all your debts every month because missing payments can wreak havoc on your credit score. On top of that, you focus the extra cash on paying down the principal of one loan at a time.
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- The “snowball” method. You prioritize paying off the loan with the smallest balance first, regardless of interest rate. You then move on to the loan with the next-smallest balance.
- The “avalanche” method. You focus on paying off the loan with the highest interest rate first, then the loan with the next highest interest rate, and so on. There are pros and cons to each. The avalanche method ensures that you pay the least amount of interest possible. It’s the cheapest way to retire your debt, but it’s not necessarily a slam dunk for everyone.
If the early wins you get from paying off your smallest balances first provide the necessary motivation for you to see your debt-paydown program all the way through, then the snowball method is the better choice for you.
While I understand the appeal of the snowball, I’m personally #TeamAvalanche when it comes to high-interest-rate credit cards. The average rate charged by credit cards in the U.S. is 15%, according to Federal Reserve data; balances compounding at this rate have the potential to grow like weeds. If you have very high-interest loans (with APRs in the high teens and 20s) I would prioritize paying them first.
3. Take Full Advantage of Your Retirement Plan
Some people might think it’s counterintuitive to invest money while you owe money. Shouldn’t you just pay everything off first, then invest? Again, the answer is that it depends on where you can get the best bang for your buck.
Once you’ve tackled any high-interest debt, consider the rate of return you could earn by investing in the market. Over the past 100 years, stocks (on average) have grown 7% per year on an annualized basis, after inflation. If you start regularly investing small slices of your paycheck compounding at a rate of 7% per year for decades, that is an extremely powerful wealth-building tool.
Also note that if your employer offers to match any portion of your retirement plan contribution, you should grab that free money. The image below shows what a big difference the match makes.
The light blue line shows the growth of $100 invested in stocks at the end of each month. The dark blue line represents the same investment with a 50% employer match. (In other words, $150 invested each month as opposed to $100.) Because investment returns grow exponentially and not in a linear pattern, funding your retirement account with as much money as early as possible gives you the best growth potential.
In short, paying off your student loans is a good idea, but you might get an even bigger financial benefit in the long run from applying extra cash toward shoring up an emergency fund, servicing an even higher-interest-rate loan, or saving more for retirement.
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