The consequences of a default on a student loan are serious. If you default on a government loan, and the guarantor is unable to rehabilitate the loan, the guarantor must immediately pay the lender the principal and interest due on the loan. The guarantor seeks reimbursement from the government, and the government then takes over the job of recovering the loss from you, the borrower. Once a student loan enters default, rehabilitation is a complicated process, and some of the harmful consequences cannot be reversed. Make use of every option available, including reducing payments and forbearance — explained later — to avoid default.
Seizure of Tax Refunds and Other Benefits
Loan Advisor Licensed Money Lender Singapore says that The government has authority to seize federal and state income tax refunds and apply them to your student loan. Instead of receiving a refund check, you will receive a notice stating that your refund has been withheld to repay your student loan. Other federal or state payments may also be withheld.
Federal law requires the Department of the Treasury to give you prior notice of the proposed withholding, and an opportunity to review loan records, to demonstrate why the loan is not in default or is not enforceable, and to make arrangements to repay the loan. Guaranty agencies can make arrangements with state governments to withhold state income tax refunds and other payments.
The government, guarantor, or lender may take legal action against you in State or Federal District Court. There is no time limit on student loan debt. Even your Social Security payments can be seized if you still have a student loan in default.
The guarantor has the right to collect up to 25 percent of the original loan balance in collection fees, even if you have made payments for several years and the remaining balance is low.
After sending you numerous delinquency notices and warnings, the lender or guarantor will refer your loan to a collection contractor and add the contractor’s commission to the amount you owe. You may be responsible for other costs incurred in attempting to collect payment on your loan, including attorney’s fees.
If you default on a student loan, the government can implement an administrative wage garnishment without judicial action. Your employer will be required to forward up to 15 percent of your disposable pay directly to the government to repay your loan. This could affect your employment because some employers are reluctant to undertake the extra paperwork, or may consider wage garnishment a sign of fiscal irresponsibility. You can appeal wage garnishment on certain grounds, but you will be required to provide formal documentation to back up all your claims. Some employers will not hire you if you have defaulted on a student loan.
Higher Interest Rates
You may be able to rehabilitate a loan that is in default and begin making regular payments, but the interest rate on your note may be higher, resulting in your paying more for the loan than you would have originally.
Ineligibility for Financial Aid
If your student loan is in default, you may not be eligible to receive financial aid or additional student loans if you decide to return to school to continue your education or get a professional degree.
This can be especially harmful if you dropped out of school after one or two years and now wish to return and complete your first degree.
Your diploma could be withheld at graduation, or you could lose your professional license. Loans in default are not eligible for deferment or forbearance.
Ineligibility for VA and HUD Loans
If you have student loans in default, you will not be eligible for other types of federal financial assistance, such as mortgages for veterans guaranteed by the U.S. Department of Veteran’s Affairs (VA) or various types of home loans insured by the Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD).
Your Credit Score
Lenders are now required to regularly report student loan payment history to the credit bureaus; this includes reporting student loans in default. A default on student loans drastically lowers your credit score and its effect is more difficult to overcome than the effect of declaring personal bankruptcy.
A low credit score will determine how much you pay for any future loans, including interest on credit cards and car loans. Some employers look at an applicant’s credit scores when hiring for management positions or positions that include responsibility for budgeting or handling money.