How to Pay Student Loans in Prison

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 Saving on a Valuable Education (SAVE) plan 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!