Consequences of Defaulting on Your Student Loans
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Consequences of Defaulting on Your Student Loans
Some people who never think of defaulting on a mortgage, a car loan, or a credit card payment might feel okay with defaulting on their student loans, especially if it becomes a choice among several necessities. But if you are considering default, know what the consequences of your choice will be.
Things To Know
- If you default, there will be a lot of consequences.
- Learn your options well in advance.
Interest charges and late fees
If you default, interest will continue to accrue on your debt. There will be late fees as well.
Damaged credit
Credit bureaus will be notified of your default. This harms your credit rating, and with a bad credit rating, getting a car loan or mortgage or other loan will become difficult.
Collections and collection fees
Both the government and private lenders may hire collection agencies to come after you to collect on defaulted loans. You may have to pay collection fees.
No more eligibility for more aid
If you default on your loans, you will not be eligible for further federal aid. You will have to begin making payments again up to a sufficient amount before you can get more aid.
Loss of professional license
Some states allow professional boards to take away, suspend, or refuse to grant vocational/professional licenses to people in default of student loans. This action is not taken without first notifying the person of it and giving him or her a hearing.
Federal benefits can be garnished
If you are getting federal benefits, they may be subject to withholding. A portion of Social Security disability and retirement benefits can be taken to pay off your debt load. A certain amount of money—$9,000 per year or $750 per month—is first excluded from that garnishment. However, Supplemental Security Income (SSI) cannot be taken.
Your wages can be garnished
The federal government can take a cut of your paycheck without a court order if you are in default. It can take up to 15% of your disposable income.
Your tax refund can be garnished
The joy of holding a big, fat tax refund in your hands each spring can turn to dust if you default on your student loans. The IRS can take all or a portion of your federal tax refund until your student loans are paid off.
Lawsuits
Because it has so many other available options, the government doesn’t use lawsuits very often against delinquent loan holders. Lawsuits are more likely to be used by private lenders. If you are sued, you will need to raise a defense against the lender’s claim on your assets. Also, there is no time limit on these lawsuits, meaning that you can be sued indefinitely.
If you are about to default
If you are about to default, do your research to learn about your options. You can consolidate loans, seek payment relief, or set up a repayment plan. If your loan is already in default, you can rehabilitate it and be freed from garnishment and other actions against you. Start well before you think you might actually default. Two places to start your research are these: