What Are the Consequences of Student Loan Default?

What happens when you don't make scheduled payments on your student loans? Some students and college graduates are burdened with tens of thousands of dollars in student loan debt without a solid plan about how they will pay it off.

If you fail to make payments on your student loans for more than 270 days without contacting your lender or attempting to get back on track with payments, you will not only be responsible for several late fees and risk having your lender report your account to collections, but your loans will also go into default.

Student loan default should be avoided because there are several consequences that a borrower can endure. If you've already defaulted on your loans, there are steps you can start taking to help recover.

Consequences of Student Loan Default

Ineligibility for Student Loan Forgiveness

Once you default on your Federal student loans, you will become ineligible for student loan forgiveness plans along with other programs such as forbearance and deferment. You will also lose eligibility for any additional Federal student aid. This means if you needed to go back to school later down the road and needed help with funding, you would not be able to take out any loans to help cover the costs of your education.

Negative Credit Score Impact

When you miss your first student loan payment, your account is considered delinquent just a few short days after. After the payment becomes 90 days past due, your lender will be inclined to report your delinquent status to the three major credit bureaus and it will create a negative remark on your credit score.

By the time your loans default if you still haven't paid, your credit score will have already dropped and been negatively affected. A lower credit score means you will pay higher interest rates and more money overall for any type of credit or loan in the future and it will take at least seven years to remove the delinquency from your credit report, even if you pay off your student loans after allowing them to go into default.

Collection Fees

When your student loans get sent to collections, you'll be responsible for paying any collection fees and late fees that occur as a result. Unfortunately, the fees will add to your principal balance and interest increasing the total amount you will have to pay back.

Legal Actions

Your lender can decide to take legal actions against you if you default on your student loans. The government or your lender can sue you or your employer can withhold money from your paycheck – which is commonly referred to as wage garnishment – at the request of the Federal government.

The Internal Revenue Service can also have your tax return withheld.

How You Can Avoid and Prevent Student Loan Default

The consequences of defaulting on your student loans can follow you for several years and negatively affect many of your future goals and decisions. It's best to avoid student loan default at all costs and develop a plan to stay on track with your student loan repayment plan.

Going into default is often a result of both failing to communicate properly with your lender and being accountable for the debt you owe.

If you feel overwhelmed, avoiding your student loans won't help or make them go away. You can reach out to your loan provider and let them know your current situation so they can offer some solutions.

You can also look into deferment, forbearance, refinancing or consolidation to help either postpone payments until you are more financially stable or lower your monthly payments to help you manage them better.

Always try to make a payment on your student loans on time even if you can't afford the minimum payment.

Don't let your student loans default and deter your finances in the years to come.

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