What Happens When You Default on Your Student loans
A considerable number of college graduates are finding it hard to pay off their student loans as the economy remains sluggish and the unemployment rate remains steady. While we always advise readers to pay off all debt in an effort to establish financial wellness and independence, it is especially important to pay off student loans.
Typically, if an individual defaults on his or her student loan past 270 days and has not reached out to their loan provider(s) to establish some type of economic hardship forbearance or get the payments deferred, there are severe consequences. College graduates should also be aware that student loans stick with you for LIFE, or if you’re lucky, for the life of the loan repayment plan (typically 25 to 30 years). This also means that student loans cannot be discharged through bankruptcy like credit cards and other types of debt.
As shocking as this sounds, recent headlines report about a Californian family’s home being raided by a S.W.A.T team called on by the Department of Education because of student loan debt related issues. Click here to see the news clip.
So what happens when a person defaults on their student loan? Here is list of what will likely happen if you default on your student loan(s):
1. Your credit rating will tank – For at least seven years, you will have a horrible credit score and will most likely not be able to get any form of credit or loan because your credit score has just been dropped by 150 – 200 points due to defaulting on your student loans.
2. You may get turned down for jobs – You know that degree that you worked hard for in effort to get a good job? Well, it may be irrelevant because after a business does a background check during the hiring process, where they have legal access to your credit report, they have every right to not hire you after they have seen that you defaulted on your student loans.
3. You may not be able to rent where ever you want – An increasing number of landlords are now checking potential tenants credit reports before they allow them to rent a property from them. Their reasoning behind this is that a credit report will reflect how responsible you are when it comes to paying your bills consistently and on time. If your credit score is ruined by defaulting on student loans, you may be completely denied from renting with that particular landlord or you may need a co-signer with a good credit report or you may need to deposit a significantly higher security deposit when you first move in.
4. Creditors will hound you via phone, mail and email – This comes with the territory of owing a creditor money, regardless if it is credit card debt or student loan debt. Creditors are also legally allowed to make phone calls to peoples work places UNLESS you ask them to stop because it is interfering with your employment and work flow.
5. Government will garnish your wages – This will not happen right away, but after so long, the Department of Education (DOE) will garnish up to 15-25% of your take-home pay if you work full-time by taking the money directly out of your banking account each much. The amount of money that creditors can garnish depends on how many hours you work per week and if your student loan is federal or private. The DOE and other creditors are legally authorized to garnish wages thanks to the Debt Collection Improvement Act of 1996.
6. You will pay the court fees – Not only will they make you pay the loan(s) that you owe them plus interest, if they have to take you to court because you have been in default for so long and did not reach out to them to negotiate a repayment plan, the DOE and other creditors will have you pay all of THEIR court fees when they take you to court.
The bottom line is, do NOT default on your student loan debt. Federal student loans disbursed by the government are typically very lenient and will work with borrowers who are facing harsh economic times. Defaulting on a student loan can cause severe repercussions that you should try to prevent at all cost.
For more information about how to recover from defaulting on student loans, contact your loan servicing agency, or the U.S. Department of Education at 1-800-433-3243.