Student loans can seem like an easy way to afford college, but they can be a huge burden after you graduate if you are unable to pay them back. What happens if you default on student loans can have an impact on the rest of your life.
When Are You in Default?
Student loan default does not happen immediately. When you miss your first payment, you are delinquent on your student loan. When you are 90 days behind on your payments, the student loan servicer will report your loan as delinquent to the credit reporting bureaus. For most loans, default actually happens when you have not made a payment in 270 days. The distinction is important because of the legal consequences that can come with default on student loans.
Consequences of Delinquency
When you are late paying your student loan, you may have trouble being approved to rent an apartment, getting a cell phone plan, signing up for utilities, or applying for other credit. Your credit rating is damaged by late payments and may result in you not qualifying for credit or being charged higher interest rates.
Consequences of Default
What happens if you don’t pay student loans is a long list of serious repercussions. Student loans cannot be discharged in bankruptcy, so all of the following possibilities are real risks.
- Tax refund offset. When you default on your loan, the IRS can keep any income tax refund you are due until your loans are paid in full. State tax refunds can also be withheld. It is possible to challenge an offset, but it can be very difficult. You can also adjust your withholding so that you will be due very little refund.
- Garnishment of wages. Another possible consequence of default is student loan wage garnishment. If you are in default on your loans, the government can take part of your paycheck before it even gets into your hands. Fifteen percent of your disposable income can be garnished, but no more than 30 times the current federal minimum wage can be taken. You have the option of objecting to a garnishment, or to the amount of the garnishment.
- Seizure of federal benefit payments. Defaulted student loans can result in federal benefit payments such as Social Security retirement or disability payments being withheld. You must be left with at least $9000 in benefits per year and no more than 15% of your total benefit can be taken.
- Loan becomes due and payable. When you default, you don’t just owe your missed payments, your entire loan becomes due and payable. You will also be liable for additional costs like late fees, court costs, and collection fees.
- Loss of eligibility. Default makes you ineligible for future federal student financial aid or for deferment or forbearance of your loan.
- A lawsuit. Your lenders can sue to collect on the loans. There is no statute of limitations on this type of suit—they can sue you at any time in your life. Liens can be placed against real property you own as a result of the lawsuit.
- Damage to your credit. Default has a more serious impact on your credit rating than delinquency and your credit rating will be affected for years to come.
How to Get Help
Fortunately there is student loan help available for those who are in default. One option is Public Service Loan Forgiveness (PSLF) Program. If you work in certain specified public service jobs for ten years, your loan will be forgiven. The other avenues to student loan forgiveness are the Income-Based Repayment (IBR) plan, Pay As You Earn (PAYE) plan or Income-Contingent Repayment (ICR) plan. These programs generally cap your payments at 10-20% of your discretionary income. Once you have made a certain number of payments, the entire balance of the loan can be forgiven.
While defaulting on your student loan is a serious situation, there are a variety of ways to pay your loan and guard your credit rating. Understanding your options is the first step to protecting yourself and your future.