Defaulting on a student loan can have a number of negative consequences. To understand loan default, it is helpful to have a few common terms defined:
Loan Deferment is a postponement of a loan's repayment. There are many reasons why someone might seek to defer a loan, including a return to school, economic hardship, or unemployment.
Loan Delinquency is a failure to make loan payments when they are due. Extended delinquency can result in loan default.
Loan Default is the failure to repay a loan according to the terms agreed to in the promissory note. A lender may take legal action to get the money back.
ConsequencesDefaulting on a loan can adversely affect credit for many years. Default occurs when a loan receives no payment for 270 days. The loan leaves repayment status and is due in-full when the lender requests. New collection costs are added to the loan’s balance, and the loan becomes drastically more expensive than before. There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.
Garnishment of Wages and Tax RefundIn addition, the IRS can take the borrower’s income tax refund until the defaulted loan is paid in full. This is a popular way of collecting on loan debt, and the Department of Education collects hundreds of millions of dollars this way.
To object, a written statement must be presented within 65 days of the IRS’ notice, and must give evidence of the following:
- The loan has been repaid.
- Payments have been made under a negotiated repayment agreement, or a cancellation, deferment or forbearance has been granted.
- The borrower has filed for bankruptcy.
- The borrower is totally and permanently disabled.
- The loan in question is not the borrower’s loan.
- The borrower dropped out of school and the school owes a refund.
- The borrower attended a trade school and the school closed.
- The school falsely certified the borrower as being eligible for a loan.
The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education or a Student Loan Guarantor can garnish 15% of a defaulted borrower’s wages. The loan holder does not have to sue the borrower first. The borrower can object to the garnishment, but only under very specific circumstances, such as if his or her weekly income is less than 30 times the federal minimum wage.Defaulting on student loans can also end in a lawsuit. The government and private lenders can sue in order to collect on loans. There is no time limit on suing to collect student loans, and the borrower can be sued indefinitely.
Getting Out of DefaultThere are rehabilitation programs designed to help borrowers get out of debt. Rehabilitation is a federally mandated program that gives federal student loan borrowers a way to bring their loans out of default. Rehabilitation can reverse the many negative consequences of defaulting on a student loan, and participation is a right granted to a federal education loan borrower.
In the rehabilitation program, a borrower must do a number of things. He or she must make at least 9 qualifying, on-time student loan payments. If any payments are missed, the borrower must begin the repayment schedule from the beginning. After borrowers complete the agreement, the guarantor transfers the loan to a lender and servicer. The loan is then considered out of default and back into repayment.