You know that uneasy feeling gnawing at you every time you get a reminder about your student loans? Ever wondered what actually happens if you never pay them off? It’s not just about another letter from the bank or a couple of calls you can ignore; the snowball starts rolling, and, trust me, it ends up a lot bigger than you might guess.

The Avalanche of Interest and Fees

Let’s be brutally honest—student loans don’t just sit there quietly if you stop paying them. Interest keeps piling on, month after month, no matter how hard you try not to look at your balance. That $30,000 might silently become $50,000 before you can say 'compound interest.' And it’s not just the original amount you owe; it’s all about the compounding effect. Interest accrues on top of interest, and suddenly you’re in debt for life, or, at least, it feels that way. The consequences are even stickier with private loans, where interest rates tend to be higher and less forgiving.

Here in New Zealand, student loans are handled a bit differently than in the US, but the basic rules of debt don’t change much. If you’re earning above the repayment threshold (currently NZ$24,128 a year, to put it bluntly), Inland Revenue (IRD) expects repayments straight from your salary. Miss out and you’ll face late payment interest (at 6.9% per year for overdue amounts, as it stood in 2025) and late payment penalties. For Kiwis living overseas, the pressure ramps up—you're expected to pay a set amount every year, no matter your income, or IRD stings you with big penalties and extra interest.

For those with American student loans, a study from the Federal Reserve showed the average balance jumps a staggering 20% after four years of nonpayment—barely any other debt grows this fast. That’s before you even factor in penalties. Add a missed payment one month, get a late fee; two months, more fees. Ignore it for nine months? Now you’re officially in default, and the hits just keep coming.

The big takeaway? Even a short gap without payment can make a hard-to-climb mountain out of what may have started as a hill. These numbers aren’t meant to scare you for fun—they’re what people actually face every day when their loans spiral out of control.

Credit Score: The Silent Assassin

Ignore your student loans long enough, and the damage leaks far beyond just your loan account. Your credit score is the first casualty. Once you fall behind by a month or more, most lenders report you to the big credit bureaus. In the States, your FICO score can plummet more than a hundred points after a default—sometimes overnight. In New Zealand, missed IRD payments aren’t reported to credit agencies unless legal action kicks off, but private loans from banks or StudyLink advances are a different story; those get flagged.

A tanked credit score isn’t something you just fix with a few on-time repayments. This black mark lurks on your record for years, making things awkward—or downright impossible—when you try applying for a car loan, renting a flat, or even getting a job. Some employers actually check your credit history, especially for roles with financial responsibility or access to sensitive info. Ruin your score and suddenly you’re not just in debt—you’ve locked yourself out of opportunities.

Deposit requirements soar when your credit looks dodgy—thinking of moving to a new flat? Your landlord might demand months of rent upfront, or you miss out entirely. Even basic stuff like getting a phone plan or electricity account can get tricky. Banks may block you from credit cards, charge higher interest, or flat-out say no. That three-digit number matters more to your life than most people realise, and student loan default can be what flips it from healthy to hazardous.

And here’s a kicker: in the US, defaulted federal student loans won’t disappear if you declare bankruptcy (except in rare, strenuous legal battles). Default lingers like a ghost, haunting every major life purchase and ruining your borrowing power for a decade or more. Even in New Zealand, while you can’t be forced into bankruptcy solely for student loan debt, your wages can be deducted directly, and if you ever move overseas, your credit reputation can tank just as hard if you ignore repayments.

Wage Deductions and Tax Refund Surprises

If you’re thinking you can just keep ducking the collectors, think again. The government, especially in New Zealand and the US, has some pretty sharp tools if you don’t pay up. The IRD will talk to your boss and start shaving off a chunk of your paycheck every pay period, zero warning needed. This isn’t just a little nibble—they can ramp up deductions to 20% of your income, making your take-home pay look embarrassingly slim.

And at tax time? Don’t get too excited about a refund. Owe money on your student loan and Inland Revenue grabs your entire refund before you even see it. In the States, the IRS can snatch your tax return too, and that goes for federal loans and even some private loans that escalate into legal action. You might open your account after New Year’s to find the dollars you counted on have evaporated into someone else’s hands.

Some people try clever tricks, like jumping overseas to dodge the debt. The catch? New Zealand regularly cracks down on expats who owe. There are stories of Kiwis coming home for visits—maybe for a wedding or family gathering—only to get stuck at the airport, greeted by debt collectors, or facing stop orders until they settle up. In 2017, New Zealand even arrested two student loan defaulters at the border as a warning to others. The message: “Pay up, or else.” Laws have stiffened since then, making evasion trickier every year.

The States may not haul you off a plane, but they will garnish wages, tag your Social Security checks, and block you from federal benefits until the debt is repaid. Some states go so far as to suspend your driver’s license or even your professional license if you default. Imagine working years to become a nurse, then losing your right to practice because of a loan you couldn’t pay. It happens—every single year.

Possible Paths Out and Tips to Stay Afloat

Alright, this all sounds grim, but there are ways to keep your head above water—if you act before the dam breaks. The first step? Don’t freeze. Hiding from paperwork or ignoring calls rarely makes a problem vanish. Most lenders, including IRD and US federal loan servicers, actually have options up their sleeves if you’re struggling. In New Zealand, you can apply for hardship relief, ask for reduced payments during rough patches, or even put your loan on hold (interest-free) if you’re studying full-time or earning below the threshold. But you have to talk to them first—dodging correspondence just adds to your misery.

For those in the States, income-driven repayment plans (IDR) set your loan payments at a percentage of what you actually make, so you’re not drowning whenever life throws a curveball. After 20-25 years of on-time payments under these programs, the remaining debt may even be forgiven. There’s also targeted forgiveness for public service workers and teachers—worth checking if you qualify.

If you run into serious medical issues or unemployment, both New Zealand and US agencies allow you to request a repayment pause. Don’t wait until the wolves are at the door; act early. The system is set up to trip you if you delay. Engaging before things get dire means you’ll avoid late fees, interest spikes, and the worst credit dings.

Here are a few tips that make a real difference:

• Set up automatic payments for at least the minimum, so you don’t miss by accident.
• Routinely check your loan balance—know your numbers, even if it’s scary.
• If you think you’re falling behind, call your loan agency right away. Ask about restructuring plans or hardships.
• Take advantage of debt calculators online to forecast your payments and see how tweaks to your income or payments will impact your balance.
• If you’re planning to move overseas, sort your repayments or arrange regular transfers beforehand—don’t wait till IRD or a bank lawyer tracks you down.
• Think about extra payments on top of your minimum, even if it’s just a little—brings down the interest mountain faster.
• Don’t compare yourself to others. Some pay off in a year, others in twenty. The point is to keep moving the needle, not to race your mates.

Student loans won’t ruin your life if you stay in the loop and deal with problems early. But ignoring them can cut deep into your wallet and future, block your plans, and take years to recover. The best move? Face it head-on—before the compounding, credit hits, and wage deductions crash your plans. Debt is just math, but paying attention can keep the numbers on your side, not against you.