Written By Travis Hornsby, CFA®, CFP®
If you've had arrests on your record, the last thing you’re thinking about is what happens to your loans if you go to jail. That said, you could cause lasting financial harm by not thinking about how to pay student loans in prison.
Hopefully, you never need to use the tips in this article. But, I thought it’d be smart to share tips about student loans and prison because nobody's talking about it.
If your student loans enter default or delinquency while you’re locked up, that negative event stays on your credit report for seven years. That raises the cost of buying a house, car, or any other big-ticket item you need to be financed.
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. Keep reading to learn what happens to your loans if you go to jail or prison.
A lot more people go to prison than you think
According to the Bureau of Justice Statistics, an estimated 5.1% of the United States population will go to state or federal prison at some point in their lives.
Prison is when you’re confined for a longer sentence. Jail is for short-term stays often when a suspect awaits judgment. 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. 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. So, I’m rooting for ex-prisoners to succeed in life.
Here's an 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 didn't pay student loans in prison and defaulted, then his only source of credit might be predatory creditors. These arrangements can often charge hundreds of percent interest a year.
What are the chances someone like this might re-enter the system?
In contrast, he could be a new man when he gets out if he keeps his credit as intact as possible and works on kicking the habit that got him sent to prison.
How many student loan borrowers are currently in prison?
Since 45 million Americans have student loans, there’s an excellent chance there are hundreds of thousands of student debtors in prison.
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.
The majority of college grads have student loans. So, 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 fail to make 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 a 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 income-driven repayment (IDR) 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, 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 IDR 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 are sent by mail.
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 Department of Education 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 on these repayment plans and getting credit toward loan forgiveness. Meanwhile, 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, hire a good lawyer and make sure you send in the agent authorization form for a family member to act on your behalf.
Getting credit for student loan forgiveness while locked up
If you're enrolled in an IDR option, you’ll automatically receive credit towards the 20 to 25 year loan forgiveness that most federal borrowers have access to.
However, many inmates could qualify for something even better called the Public Service Loan Forgiveness program (PSLF). With this program, 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.
PSLF eligibility requirements include being 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 nonprofit employer.
The wages for UNICOR worker inmates are around $1.00 an hour. But you could still qualify for PSLF if you were employed by this UNICOR program.
So, 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 a fraud lawsuit. Although I don’t recommend this strategy in general.
I don’t pretend to stake a claim as to the wisdom of this apparent loophole for paying student loans while incarcerated. But it does exist. If you or a loved one could qualify, you should take advantage of it.
If you don’t qualify for PSLF in prison, you still get credit toward taxable student loan forgiveness options that take 20 to 25 year under an IDR plan.
What happens to your loans if you go to jail?
Remember that a prison term is longer than jail time by definition. In fact, many people go to jail and are found innocent of the charges. But they stay there for a while because they cannot afford to post bail.
In this case, know that student loan servicers report delinquent student loan payments to the credit bureaus once payments are 90 days late.
After 270 days of non-payment, federal loans enter default and the entire loan amount can be due at once. Private student loans might have an even shorter default timeline. At this point, private lenders and debt collectors can add as much as 16% on top of the balance as a fee.
If your jail stay will last more than 90 days, make sure you have someone helping to get your agent authorization set up.
Perhaps you could arrange to get it signed with your lawyer. Alternatively, 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 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 debts case, not a criminal offense.
If you happen to default on your federal or private loans, you can experience severe financial penalties. This might include wage garnishment, seizure of tax refunds or 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.
- Add an authorized agent to all accounts where you have student loans as soon as you can.
- Take action and enroll in an IDR plan. Your payments could be as low as $0 a month, and they'll count towards loan forgiveness.
- 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 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. Take 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 can help 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!
Not sure what to do with your student loans?
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My son was sentenced to 15 years March 1st. He has student loans subsidized and unsubsidized and federal student loans. I have parent plus loans also.
I have NO clue about where to start or who to talk to. I have the court order and he is currently waiting to be processed into the prison but is incarcerated in a jail while he waits for processing. Any assistance you could provide would be a welcomed relief. He is a good kid that made a very bad decision to drink and drive 3 years ago that resulted in permanent injury of an occupant of the other vehicle he collided with. The charge is Aggravated DUI, leaving the scene-not by his choice but had to take the charge and regular DUI. To say I am devastated and overwhelmed is an understatement. Thank you for posting this and any assistance you can provide
I imagine you’re going through a terrible time Donna. Eventually when he gets released he’ll want to not have his credit be wrecked and the loan be massively larger than it was. I think your best bet is to get power of attorney through his loan servicer, such as this form: https://mygreatlakes.org/educate/knowledge-center/third-party.html
You’d be able to submit annual income driven certifications for him. Since his income would be 0 he’d qualify for REPAYE with a 0 dollar payment and a 50% subsidy on all his interest if you did this. With your Parent PLUS loans you could consolidate those into your name and sign up for the ICR program or you could just make the payments if they’re smaller.
That was a very good post very informative. But what if you went to jail and never got to do any of that stuff. Do you have any information or advice on what to do after all that happens? My boyfriend went to prison for a few years and never knew about in that stuff. Now that he’s out, he really wants to figure out how to pay back his loan, and is also hoping that he can get some kind of deal. Although I’m not quite sure what he means by that.
You’ll want to call the default resolution group at the Dept of Education. Their number is 800-621-3115. That’s one way to get the process going. The other is just to visit studentloans.gov and see if he has something that can be consolidated and placed on the REPAYE plan. That would limit anything he owes to 10% of his income.
hello i may be going to jail soon idk but my mom said all my loans would immediately need to be paid back if i get convicted is that true?
If you dont make any payments the loans can go into default and become immediately due and then they balloon while you’re in jail and then when you get out you’d try to get it set up correctly. I’d add your mom as a power of attorney on your account before you serve time so she can sign you up for income based repayment
Hello, A good friend has about 6 months left of his term of 30 months. He just got notification from his student loan and the interest is sky high for these months incarcerated. He’s pretty sure the Loan people don’t even know he’s in prison and wonders how he can make any payments. He does get some pay and has become a “legal assistant” for fellow inmates in this minimum security prison. What would you suggest he do next? Thanks so much for this help. He really is a good person and wants to handle all this responsibly. -Tom
If it’s federal loans, he needs someone added as a power of attorney so they can enroll him in the REPAYE plan. Here’s an example https://mygreatlakes.org/educate/knowledge-center/third-party.html
This DOES NOT make that person a cosigner or give legal liability to the person who signs. It’s simply giving permission with the loan ppl that you can act on their behalf.
It’s best to get this signed before someone gets sentenced, but if that’s not possible hopefully someone could get this added while someone is incarcerated too. It makes a big difference for the interest amount owed as you can pay 0 a month and get half of that interest subsidized.
Are there any options if an individual contacted their loan provider prior to being incarcerated and they didn’t offer any options so for five years they were not able to make payments on their student loans they borrowed $15,000 for student loan they have more than paid that back but still owe over $30,000 and now currently can only afford to pay the interest payment every month and nothing more
You can sign up for REPAYE which can at least control your payments and give you subsidies if your income is low right now. But nothing can be done after the fact. Strongly encourage borrowers to add an authorized agent so they can have that person submit REPAYE certifications while incarcerated so the balance doesn’t explode in size.
So, what I am understanding is that the student loans I had ($10,000) when I got
arrested and incarcerated for 12 years, are allowed to continue to balloon and add default penalties and fees, even though I’m in prison? Something about that does not seem right. Most debts got frozen when I entered the system. IRS as well. Now I owe $30,000 without recourse?
I’m sorry to hear that’s what you’re going through. The only way to deal with it is to get a power of attorney to submit proof of your income being low while incarcerated if you have federal loans. If you have private loans and don’t pay there’s no way to avoid default, although statute of limitations for private loans can sometimes be 7 years and you might not actually owe the debt unless you restart the clock by making another payment.
Is it possible to delay tax on forgiven loan until he gets released. We co-signed but, have nothing. We’re trying to make it . I cry about this having to pay tax on his 19,300 dollars of debt that was forgiven. Is there anything we can do? We are in our 60s
If the debt was forgiven, was it forgiven because of disability? If it’s federal loans there’s never tax on forgiven debt except if you paid for 20 or 25 years.
So i was making payments on my federal student loan…. I got incarcerated in federal prison and now my debt amount is double of my principle. Im still on supervised release and bearly getting on my feet. I had planned on selling my truck to pay of the loan but now i owe more in intrest than my original debt. I was expecting my income tax to pay off a tittle loan and i never recived it. I looked it up and my 1500 dollars got offset…
I dont know what to do…
Original amount was 4200 i made payments for 2-5years and brought it down to 2000… I get out of prisson and i owe 3850
Its not fair.
So sorry Luis. Try consolidating the loan by logging into https://studentaid.gov/app/launchConsolidation.action. Click on the “consolidate my loans” section. You should see a list of your loans. Check all the ones you want to include (all of them). Sign up for the REPAYE program and all of your payments will go to principal until the end of September and youll accrue no interest. You can do it!
My wife Just passed 3 years in prison She might be Eligible for early release in One year and a 1/2 if not She has to do here mandatory of 8 years.
so my question as she used to go to college before she get involved in drug related And she hasn’t done any payment past those 3 years, is There anyway she would be eligible for a student loan relief?
I also believe she might be going back to school when she’s out is that could happen? and can you guide me where to go from here. thank you
If she hasn’t made any payments in 3 years, there’s a good chance she’s in default. You’ll want to call the default resolution group at the Dept of Education. Their number is 800-621-3115. You’ll want to compare consolidation to rehabilitation. This is only for federal loans. If you have private loans you might want to contact a student loan attorney.
Her students loan are through great lakes
My wife had a student loan for 60k, (she got her Master’s) but she was sentenced to prison for 3 years (state custody) this was over 8 years ago, she tried to resolve it while in custody but fed loan servicing refused, now in 2020 her student loan swelled to over 260k incredible amount- from the time she got out of prison she tried to get a job but NO ONE would hire her, I told her to keep trying and that after her first job she will eventually land a better job and that’s what happened she has had some of her loans in deferment but my question is- wouldn’t the federal student loan program at least give her credit for those years in prison that she was unable to pay or at least wipe out 3 years of interest?
That isn’t how the system is currently designed. You could reach out to a student loan lawyer to review her legal options.