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Default Prevention: Understanding the Consequences of Defaulting on Federal Student Loans

In my previous articles, I discussed the options a student or graduate has when faced with large student loan payments and the inability to comply with standard repayment. I felt it best not to stop there but discuss the very real and serious consequences of defaulting on student loans.

This all came to me as I learned of a loved one’s pressing circumstance of a gargantuan monthly student loan bill and an extremely low-paying job. While he is working to exhaust all options, the pressures of payment are still animate as he waits for repayment alternative approval.

Whether he has the money or not, the payments are still due. Whether or not the lender knows of his situation, a missed payment is still a strike against him. If you are in a similar circumstance or simply feel that it’s “no big deal,” allow the following information to enlighten or perhaps motivate you.

Consequences of Defaulting on Student Loans

The following was retrieved directly from the U.S. Department of Education, Federal Student Aid Collections Guide:

• After 270 days, the loan is delinquent.

• In the course of delinquency, “due diligence” is made in efforts to collect on the loan. If unsuccessful, the lender will place the loan in default, and it will go on to a guaranty agency in the debtor’s state.

• The defaulted loan may be “accelerated” wherein the complete balance of the loan is due in a single payment.

Typical loan recovery procedures are as follows:

• Any tax refunds or payments can be authorized by law to apply to the outstanding loan balance.

• While in collection, the defaulted loan can accrue collection costs and/or agency fees increasing the overall outstanding balance.

• Administrative Wage Garnishment of 15% can be deducted from debtor’s salary and applied toward outstanding loan balance.

• Legal action may be imposed.

• Credit agencies will be notified and the debtor will be subjected to credit damage.

• Debtor will become ineligible for alternative payment options such as deferment or forbearance and will not be able to qualify for future student aid.

If you have already gone into default, there are still yet options for you. Repaying Loans in Default