Defaulting on Student Loans

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• your gross pay minus amounts that are deducted by law.  In addition to the loss of part of your earnings, many employers have a poor view of employees who have their wages garnished.  They might look upon such employees as irresponsible.
• A collection agency might start harassing you to pay your defaulted loans.  Collection agencies can be very aggressive, and although there are restriction on their activities, dealing with these people is not fun.
• Not only do you have to put up with being harassed by a collection agency, you must eventually pay for the privilege.  You can be held liable for collection costs, and these can easily add 25% to the loan amount you owe, sometimes even more.
• Any tax returns you are due from the federal or your state government can be confiscated and applied to the loan amount due.
• You can be sued for the amount of the loan.
• Your credit rating will be lowered, and this will make it difficult to borrow money for a car or home purchase, for example.
• If you are eligible for Social Security, a part of those payments can be withheld from you.
• You won’t be able to take advantage of other federal benefit programs.
• You might possibly be unable to renew a professional license.
• You will lose the ability to obtain a loan deferment.
• You might be prohibited from entering the military.
• Any subsidized interest benefits will be denied.  This means that if the government was paying interest on your loan while you were a student, you will now be liable for that amount as well.

How Student Loan Default Can Be Avoided

• Act like an adult-Make sure you understand what you loan obligations are.
• Make your payments on time.
• If you run into financial difficulties, notify your lender of the problem before you default.  Try to obtain a deferment or a forbearance to give you some more time and breathing room.  Do this before going into default.  Loans in default are not eligible for deferment or forbearance.
• Be aware of alternate repayment options that are available to you such as the Income Based Repayment (IBR) Plan, the Income Sensitive Repayment (ISR) Plan, and the Income Contingent Repayment (ICR) Plan.  The IBR Plan will generally give you the lowest monthly payment.
• Before going into default consider getting a consolidation loan to combine your student loans into one payment.  If you then couple this with the IBR Plan mentioned above, you’ll have a low and affordable payment.  Your loan will be extended in time and you will eventually pay more, although that is better than default.
• Be aware that in certain circumstances some of your student loan debt can be forgiven. This is possible for people who serve in the military (both active duty and reserves), become teachers working in low income school districts, become healthcare workers in some cases, and employees of the federal government, or people who work in public service jobs in some cases.

Remember, for all practical purposes you cannot get out of your student loan obligations by declaring bankruptcy.  People who default on student loans have often also built up credit card debt.  If you are in that kind of trouble you might want to consider finding some kind of credit counseling.  One good resource is to listen to Dave Ramsey’s syndicated radio program or read his books like “The Total Money Makeover”.