What Happens When You Default on Student Loans?

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Mark Kantrowitz

By Mark Kantrowitz

June 28, 2019

When borrowers default on their student loans, the consequences are severe. Default ruins the borrower’s credit, limiting access to future forms of consumer credit. The borrower will have to pay collection charges, which can significantly increase the cost of the debt. The federal government has very strong extrajudicial powers to compel repayment of federal student loans.

The definition of default depends on the type of loan. A federal student loan goes into default after 360 days of delinquency. A private student loan is considered to be in default after 120 days of delinquency. Delinquency is the failure to make a payment when due.

The consequences of default include increases in borrowing costs, bad credit reports and loss of government benefits. In most cases the debt will still ultimately be repaid because the federal government has strong tools to force the borrower to repay the debt.

Borrowing Costs will Increase

Defaulting on student loans causes increases in borrowing costs on both existing and new debt.

  • Collection charges of up to 20% are deducted from every payment on Federal Stafford, Federal PLUS and Federal Consolidation loans and up to 40% on a Federal Perkins loan. Collection charges include court costs and attorney fees if the lender wins a judgment against the borrower.
  • Collection charges on private student loans can be even higher and may be added to the loan balance.
  • If a borrower rehabilitates a defaulted federal student loan, collection charges can be added to the loan balance.

The Borrower’s Credit will be Ruined

When a borrower defaults on a student loan, the default will be reported to each of the three major credit bureaus (Equifax, Experian and TransUnion), ruining the borrower’s credit.

A bad credit report makes it difficult for the borrower to qualify for credit cards, auto loans and home mortgages.

If the borrower does qualify for consumer credit, they will be charged a much higher interest rate.

When delinquency and default show up on a borrower’s credit report, it can affect their ability to get a job, rent an apartment, get a cell phone and qualify for insurance. Utilities may require a large security deposit.

Loss of Benefits

Defaulting on a federal student loan causes the borrower to lose certain federal and state benefits.

  • The borrower becomes ineligible for further federal student aid
  • The borrower will no longer be able to choose a repayment plan and may be required to repay the debt in an income-driven repayment plan
  • The borrower loses eligibility for deferments and forbearances on federal student loans
  • The borrower will be ineligible for FHA and VA mortgages
  • The borrower may be unable to renew professional licenses, including driver’s licenses
  • The borrower will be unable to enlist in the U.S. Armed Forces

In addition, colleges may withhold official academic transcripts, which may make it difficult for the student to continue his or her education at another college. Losing access to official college transcripts can prevent the borrower from applying for jobs that require copies of academic credentials.

Strong Powers to Compel Repayment

When a borrower defaults on their student loans, lenders have several tools they can use to recover the defaulted debt.

  • The student loan debt becomes due in full immediately.
  • The borrower’s loans will be sent to a collection agency, who will demand repayment.
  • The federal government can garnish up to 15% of the borrower’s wages without a court order. Private student loans can garnish up to 25% of the borrower’s wages, depending on the state, but must first get a court judgment against the borrower.
  • The federal government can offset (withhold) federal and state income tax refunds, and up to 15% of Social Security disability and retirement benefit payments, to repay the defaulted student loans.
  • The federal government can seize lottery winnings to repay the defaulted student loans.
  • The borrower may be sued to recover the debt, leading to bank levies and liens against real estate or other property owned by the borrower and cosigner/endorser, if any.
  • The lender will seek repayment from the cosigner on a private student loan.

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