Consequences of Student Loan Default
- Publish Date: 2011/12/30 - (Rev. 2013/06/15)
- Author: The Slomka Law Firm, P.C.
Outline: Defaulting on federal student loans can have disastrous consequences as the government can garnish wages withhold tax returns and place liens on personal property.
Main DigestPotentially Disastrous Consequences for Student Loan Default - Unlike other types of debt, defaulting on student loan debt can have life altering consequences.
Student Loan - A U.S. federal student loan allows students and their parents to borrow money to help pay for college through loan programs supported by the federal government. They usually have low interest rates and offer attractive repayment terms, benefits and options. Generally, repayment of a federal loan does not begin until after the student leaves school. Federal student loans can be used to pay school expenses such as tuition and fees, room and board, books, supplies and transportation. Federal student loans are delivered to students through the Direct Loan Program. Loan funds are provided through schools.
With high unemployment and declining household incomes, meeting student loan obligations can be difficult, if not impossible. However, defaulting on federal student loans can have disastrous consequences. The government can garnish wages, withhold tax returns, and place liens on personal property. A default can also affect a person's professional license status. It's important for student loan borrowers to note that a default should be avoided at all costs.
Missing one student loan payment makes a borrower delinquent. Nine months of delinquency puts a borrower in default. Lest anyone think they are the only ones defaulting, the U.S. Department of Education recently released data showing that approximately 20 percent of federal student loans made since 1995 have gone into default.
Future Financial Aid, Loan Forgiveness Cut Off
While any default hurts a borrower's credit, a default on student loans draws government retribution. Once a default occurs, the full amount of the loan(s) is (are) due immediately. The government also cuts off any future federal financial aid and strips the borrower's eligibility for loan forgiveness. The government can then garnish up to 15 percent of the borrower's disposable income.
Tax Returns Withheld
Because 15 percent of one's income is not likely to pay the full debt, the government's can also withhold any a borrower's tax return. Depending on the situation, it could result in a substantial involuntary payment. The total adds up quickly too, with the Department of Education collecting hundreds of millions of dollars annually in this manner.
Loss of Retirement Benefits
If the borrower has not paid the balance of a loan by the time he or she reaches retirement, that borrower could lose federal benefits like Social Security (both retirement and disability). Thankfully, the government cannot withhold more than 15 percent of the benefit and cannot touch Supplemental Social Security Income.
Seizure of Assets
If the borrower has a significant number of assets, the government can sue the borrower to place liens on banks accounts and property. To add insult to injury, the borrower can be liable for court costs and attorney's fees. Unlike other debts, there is no statute of limitation on filing suit on student loan debt.
Collection Agency Fees
Any debts can be sent to a collection agency and the agency can tack on up to a 25 percent fee on the total amount of loan. For those with a significant amount of debt, that can be a financial nightmare. To top it all off, student loan debt is generally not dischargeable through bankruptcy. In other words, those who may have recklessly spent more on cars and trips and electronics can walk away from their obligations, while those who tried to better themselves through education are forever burdened with the cost.
Loss of Professional Licenses
For those with professional licenses (doctors, lawyers, teachers, accountants, dentists, etc.), failure to pay student loan debt can result in loss of the state-issued license. While some argue that it's counter-productive to strip the borrower of the means by which they would earn money to pay down the debt, it is a reality.
The bottom line is that the situation can be challenging for those saddled with student loan debt and default should be avoided at all costs. Even during tough economic times, the federal government will diligently collect on the loans by garnishing wages, withholding tax returns, denying Social Security benefits, placing liens on assets, getting collection agencies involved and flat out suing you.
If you are struggling to make student loan payments or are facing default due to insurmountable debt, contact an experienced bankruptcy attorney before default occurs. Filing for bankruptcy may allow you to erase other outstanding debts to free up funds to go towards student loan obligations.
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