If you go to prison, the last thing you’re probably thinking about is how to pay your student loans. That said, you could cause lasting financial harm to yourself by not thinking about how to pay student loans in prison while you’re incarcerated.
Hopefully, you never need to use the tips in this article. But, just in case I thought it’d be smart to share tips about student loans and prison because nobody is talking about it.
If your student loans enter default or delinquency while you’re locked up, then that negative credit event stays on your record for seven years. That raises the cost of buying a house, car, or any other big-ticket item you borrow for.
If you owe Federal Direct student loans, you can avoid negative financial impact even though you are behind bars. You might even be able to build credit towards loan forgiveness.
A Lot More People Go to Prison Than You Think
According to Quora, about 5% of the population goes to prison at some point in their lives. Prison is when you’re confined for a longer sentence, and jail is for short-term stays often when a suspect awaits trial. I’ll focus on the longer-term prison stays since jail terms end more quickly.
A typical prison sentence is a couple of years according to the Bureau of Justice Statistics. That means there are a bunch of citizens out there who will re-enter society after serving their time.
I met a lot of folks while volunteering in the Philadelphia prison system a couple years ago, so I’m rooting for ex-prisoners to succeed in life.
In the most obvious case where a prison stent could ruin someone financially, imagine a non-violent drug offender receives a felony conviction. He now has to admit to having a felony on every job application he ever applies for in the future.
At best, he might make a modest income coming out of prison. If he defaulted on his student loans while he was locked up, then his only source of credit might be predatory lenders who would charge him hundreds of percent interest a year.
What are the chances someone like this might re-enter the system?
In contrast, if this person could keep their credit as intact as possible and really work on kicking the habit that got them sent to prison, he could be a new man when he gets out.
How Many Student Loan Borrowers Are Currently in Prison?
Since 45 million Americans have student loans, there’s an excellent chance that there are hundreds of thousands of student debtors in prison currently in the United States.
Even if only 5% of prisoners have college degrees, out of a prison population of over 2 million that’s 100,000 people that could have student debt.
Since the majority of college grads have student loans, I would wager that the number of inmates who owe at least $10,000 in student debt would be in the mid-tens of thousands.
What Happens if You Do Nothing For Your Student Loans in Prison?
If you make no payments on your student loans while in prison, your credit score will plunge. You’ll have a harder time getting a good interest rate on everything from a mortgage and car loan to a credit card and personal loan.
Imagine not being able to qualify for a credit card or conventional car loan when you get out. If you borrow from a payday lender, your interest rate could be over 400%. That might be your only option if you have student loan default on your record.
Would your chance of going back to prison be higher if you had to get a job with a criminal record AND you only had access to extremely expensive loans? Of course.
You want to have as few roadblocks as possible to financial success when you re-enter society.
What if repaying federal student loans while incarcerated was possible? The good news is that a strategy is available to implement.
You could prevent thousands of dollars in higher interest charges simply by utilizing the income-driven repayment programs on your student loans. By paying as little as $0 a month, your loans would still be in good order.
The problem comes with certifying your paperwork.
Adding an Authorized Agent to Your Student Loan Account
Every loan servicer has an option to add an authorized agent to your account if you fill out the paperwork. This is by far the best option to make sure your student loans don’t enter student loan default while incarcerated.
Great Lakes, one of the biggest loan servicers, just requires you to fill out this online agent authorization form and have it notarized. You could choose a member of your family that you trust to fill out income driven payment applications for you.
Most of the servicers allow you to complete any applications needed online. However, in prison you might have limited access to the internet. Some prisons offer advocate services and will make sure paper applications get to where they need to go.
However, if you’re stuck without a prison advocate, then you need to figure out a way to get your income-based repayment application to the servicer that holds your student loans.
If you’re in prison, your income-based repayment is most likely going to be $0 a month. I suggest choosing between the Revised Pay As You Earn plan (REPAYE) and the Pay As You Earn plan (PAYE).
You could literally be paying $0 a month and getting credit toward loan forgiveness while your cellmate is paying $0 on his loans but hasn’t filled out the payment application and is in default.
Hence, if you have student loans and are out on bail, besides hiring a good lawyer I’d make sure I sent in the agent authorization form for a family member to act on your behalf.
Getting Credit For Student Loan Forgiveness While Locked Up
You’re automatically receiving credit towards the 20-25 year loan forgiveness that everyone gets as long as you’re enrolled in an income-based repayment option.
However, many inmates could qualify for something even better called the Public Service Loan Forgiveness program (PSLF) where you can pay based on your income for 10 years and then have your balance forgiven tax-free.
The company UNICOR is also known as Federal Prison Industries. This government-owned organization employs thousands of federal prisoners to perform work.
The requirement for PSLF is that you must be employed for at least 30 hours a week for at least 8 months a year. Unless the employer specifically designates a different requirement to be considered a full-time employee, you would qualify for PSLF if you’re working at such a government or not for profit employer.
Even though the wages for UNICOR worker inmates are around $1.00 an hour, you could still qualify for PSLF if you were employed by this UNICOR program.
While I don’t recommend it, a physician with seven years of credit towards PSLF might be able to continue working towards the benefit even if he went to prison for fraud for a few years.
I don’t pretend to stake a claim as to the wisdom of this apparent loophole for paying student loans while incarcerated, but it exists and if you or a loved one could qualify you should take advantage of it.
If you don’t happen to qualify for PSLF in prison, you still get credit toward the taxable student loan forgiveness options that take 20-25 years. You only must be enrolled in an income-driven payment option.
How Do You Manage Student Loans if You Go to Prison?
Remember that prison terms are longer than jail terms by definition. In fact, many people go to jail and are found innocent of the charges but stay there for a while because they cannot afford to post bail.
In this case, you should know that student loan servicers report delinquent student loan payments to the credit bureaus once a payment is 90 days late.
After 270 days of non-payment, the loans are in default and then the entire loan amount is due at once. At this point, the collection agencies can add as much as 16% on top of the balance as a fee.
Since jail is typically more short-term, you want to make sure that if your stay will last more than 90 days that you have someone helping you out to get your agent authorization set up.
Perhaps you could arrange to get that signed with your lawyer or you could see if a loved one could arrange this for you during the trial. Of course, the ideal scenario is being out on bail and taking care of the agent authorization this way just in case you are sentenced.
Can You Go to Prison for Not Paying Student Loans?
Absolutely not. Failing to pay your student loans is at worst a civil, not criminal offense.
If you happen to default on your student debt, you can experience severe financial penalties such as wage garnishment, seizure of tax refunds, and even loss of a portion of your Social Security check.
However, I’ve never heard of someone going to jail or being arrested because of their student loan debt.
Action Steps for Your Student Loans if You Go to Prison with Student Debt
Let’s recap these steps to help you pay student loans in prison.
- First, you want to add an authorized agent to your account with every spot where you have student loans as soon as you can.
- The reward for taking action is making payments as low as $0 a month that count towards loan forgiveness.
- On top of that, you avoid student loan default continuing payments. Default damages your credit and would make it significantly harder to survive financially when you get your freedom back.
- In some special cases, you might even be able to get credit for the PSLF program and have your loans wiped away at certain federal facilities.
Don’t despair and stop thinking about your finances just because you face a setback like this. If you have to pay your debt to society, make sure you give yourself the best shot at becoming a citizen in good standing again by taking care of your student debt while in prison.
If you have student loans or have a loved one who has significant student debt who’s having problems in the legal system, we could help you make a plan.
If you’ve ever experienced dealing with student loans while going through the criminal justice system, feel free to leave a comment below. Remember you can be anonymous if you want!