Defaulting on your student loans is a bad idea. It ranks up there with that time you drank far too much tequila and did that thing that you’re fairly certain would keep you from ever holding public office if anyone had the pictures to prove it. Luckily, there are a lot of ways to keep from defaulting. Whether you negotiate better repayment terms, consolidate and refinance your loans, or request a deferral or forbearance, you should be able to find a way to keep from falling into default.
But what happens if you’re already in default? Check out my post on how to rehabilitate your student loan and get back on track.
What Does Defaulting Mean?
You officially default on your student loans when you haven’t made a payment in 270 days or nine months, and haven’t contacted your lender to make alternate arrangements. Before you default, you will be delinquent on your student loans, which means that you’ve missed payments. When you default, you’re obligated to pay the balance, interest, and collection fees right away. However, most people default because they can’t pay the monthly payments, so paying all that is usually impossible.
That means that you have to negotiate a repayment plan with your loan provider or they may start garnishing your paychecks. The problem is that defaulting on a student loan means that you’re excluded from a lot of the programs that make it easier to repay your student loans are getting a break from paying during difficult times.
Things to Know About Student Loan Default:
People (like me) say that defaulting is a bad idea but what really happens if you default on your student loans?
- It Will Hurt Your Credit – Defaulting will affect your credit negatively for many years to come. This will make it harder, if not impossible, for you to qualify for credit cards, car loans, and mortgages. As some employers and landlords request credit checks before hiring or letting a house or apartment this could impact your ability to find work or rent a house or apartment
- You’ll Have to Pay Collections Costs – When your loan goes into default, the lender hires a collection service or sells your loan to another company who then go after you for payment. These collection costs get added to the total amount you owe. It can sometimes be as much as 16% of your loan.
- You Lose Options – You are no longer eligible for deferment or forbearance on your loan. Perhaps you lost your job and you figure that you should just default. Well, most likely you could have gotten your student loans deferred. But now that you’ve defaulted, that’s not possible.
- You Can’t Get Federal Student Loans – You won’t be able to get federal student loans if you’re in default. Since defaulting is bad for your credit, your ability to get private student loans will also be severely limited.
- Your Paycheck Might Be Garnished – You can potentially have an order put into place to garnish part of your paycheck. That means that your employer is forced to remit part of your paycheck to the lender who holds the loans you defaulted on. This is often done without a lawsuit and they can take up to 15% of your wages. While the borrower can object, it’s only under specific circumstances or if you’re very low income.
- You Might Not Be Able to Receive or Renew Professional Licenses – In some states, you can have professional licenses taken away and in Montana, you can even have your driver’s license taken away. If you’re a nurse, for example, who has their professional license revoked, that would mean you would also lose your job.
- Your Tax Refunds Might Be Seized – Any federal or state payments or tax refunds could be taken to pay your student loans.
- You Might Not Be Eligible for Federal Benefit Programs – There are certain benefits that you will no longer be eligible or which the government can garnish for student loans. For example, they will take Social Security Retirement Benefits, and Social Security disability benefits to pay your student loans. They are restricted from taking any more than would leave you with $9,000 a year or $750 per month but that isn’t very much to live on.
- You Might Get Sued – You could potentially get sued to repay your loans and you could be responsible for court costs and attorney fees.
As you can tell, defaulting on student loans is bad news. If you’ve already defaulted, then learn more about how to rehabilitate your loans. If you are concerned you are headed towards student loan default, learn more about deferment and forbearance. Refinancing or consolidating your student loans might also help.
This article is part of my Complete Guide to How Student Loans Work.