The Consequences of Defaulting on Student Loans

Graduates are leaving themselves with more student loan debt upon graduation than ever before, and many find themselves unable to pay. Here, attorney Jeffrey Scholnick, details the potential consequences of defaulting on student loans.

The average college graduate has more than $35k in student loan debt, and more than eight million graduates will default on their student loans. Defaulting on a federal student loan means failing to pay the loan as per the loan terms or failing to make arrangements with the lender for 270 days. Defaulting can reap serious consequences for former students, as detailed below.

Credit Score Impact

Failing to pay student loans may force the lender to turn them over to a collection agency, which will cause the default to show on your credit report. Even after defaulted loans are paid, they can remain on your credit report for as long as seven years after. Having a defaulted loan on your credit report can negatively impact your ability to get a loan for a car or home, or even rent an apartment.

Collections and Lawsuits

If your federal loan is sent to a collection agency, there are several ways that the government can ensure they receive payment. They are able to withhold income tax refunds, Social Security payments and other federal payments, or they can order your employer to withhold up to 15% of your disposable pay—any income received after taxes and other legally required deductions are made—to be used as repayment for defaulted loans.

Loans provided by private lenders can also be sent to collection agencies, and failure to pay can cause the lender to sue, leading to hefty court costs, attorney fees, and other collection-related costs. While the case is proceeding, your loan will continue to accrue interest, creating an even greater debt burden.

Employment Concerns

Having a defaulted student loan on your record can prevent you from receiving employment at a federal, state, county, or city government agency. If someone already works for such an agency, and then defaults on their student loans, they can be suspended or even terminated if they employer finds out. Having a defaulted student loan on your record can prevent you from receiving a position that requires security clearance. Even those working for private companies may run into trouble with a defaulted student loan on their record—a company has the right to check an applicant’s credit report, and a defaulted loan may be perceived as a lack of responsibility or trustworthiness on the part of the applicant.

Default Prevention

How to prevent default? Always make full loan payments on time. If you are unable to make full loan payments, contact your lender immediately, as they are likely to come to a repayment agreement with you. Once an agreement has been reached, keep to it. Consolidating and refinancing student loans can also help make loans more manageable, and easier to keep track of and pay.

One of the surest ways of preventing student loan debt default is hiring an attorney well-experienced in the field of student loans.

For example, I was recently  hired by a graduate who was in default on her federal loan and facing garnishment of her wages.  I was able to advocate for a “rehabilitation program” that will allow her to pay 9 months at $100/month to come out of default and avoid garnishment.  At the end of the 9 months, her loan will be restructured so that she can start paying her loan again at a more reasonable monthly payment.  By working as her advocate, I presented forms that I have created to show the severity of her present circumstances.

At Scholnick Law, we are dedicated to ensuring graduates never suffer the devastating consequences of defaulting on student loans. Don’t wait—one of our legal representatives can get you back on the path to becoming debt free. For more information, contact us today!