Consequences of a Student Loan Default
A student loan default occurs when a borrower fails to stay current with the monthly payments on their student loan. Consequently, a borrower may be responsible for collection fees and for the commission charged by the debt collection agency.
Delinquency vs. Default
Delinquency begins the first day a borrower misses a payment. It is like a warning sign to the borrower informing them to make up the missed payments before a student loan goes into default.
If a borrower remains delinquent for nine months, the student loan enters default. When the loan enters a default, you will be immediately liable for the entire amount of the defaulted student loan.
Consequences of Defaulting on Your Federal Student Loans
The federal government has a wide array of powers to collect late payments and defaults. The U.S. Department of Education can do any of the following to collect the debt:
Take Your Tax Refund
One of the most effective methods that the Department of Education and loan guaranty agencies use to collect defaulted student loan debt is to seize a borrower's tax refund.
Every year, the IRS gets a report from the Department with a list of defaulting student loans. But before a tax offset is removed from the refund, you will receive a notification from the Department or the loan guaranty agency with the option of paying the debt or appealing the offset.
Unless you appeal, the IRS automatically takes your federal and/or state income tax refund and applies it towards the loan repayment.
A borrower may appeal the offset by asserting one of the following defenses:
- The loan has been repaid
- The loan is being paid under a negotiated repayment plan
- The loan is in deferment, forbearance, or has been canceled
- The borrower is deceased or suffers from permanent and total disability
- The loan does not belong to the borrower
- The loan is unenforceable because of fraud, such as a forged signature
- The school owes the borrower a refund
- The borrower's school closed
- The borrower was falsely certified for loan eligibility
- The borrower has filed for bankruptcy and the case is still pending, or a bankruptcy discharged the loan
The borrower must issue an objection to the offset within 65 days from the date of the notice.
Garnish Your Paycheck
The Department of Education and loan guaranty agencies may also garnish wages to collect student loan debt. They do not need to obtain a court judgment prior to garnishment.
The Department and the loan guaranty can garnish your income in the following manner:
- They can take up to 15% of your disposable income.
- This amount must be less than 30 times the hourly minimum wage ($7.25/hour effective July 24, 2009).
- The Department or agency can't garnish more than $217.50 of a debtor's weekly income.
Before the garnishment, the borrower will:
- Receive notification with information about the garnishment,
- Be given the opportunity to repay the debt, and
- Be given the right to request a hearing to dispute the wage garnishment. The borrower can base an objection on the reasons listed above under "Take Your Tax Refund."
If a borrower requests a hearing within the due date specified in the notice, the borrower's wages are safe from garnishment while the case is under review. If the borrower fails to make such a request by the deadline, however, wage garnishment may proceed but will terminate if the borrower ultimately prevails in a hearing.
Take Your Federal Benefits
The Debt Collections Improvement Act allows the government to take some Social Security benefits from a student loan borrower in default. The Act has the following key provisions that apply to student loan payments when a borrower defaults:
- Supplemental Security Income is off-limits.
- Social Security retirement benefits and Social Security disability benefits can be set aside to pay loan debt.
- Only $9,000 per year, or $750 per month, can be used. If the borrower receives less than this amount, taking Social Security benefits is prohibited.
- The amount cannot exceed 15% of the borrower's federal benefit.
The borrower may object to the offset by requesting a review within the time specified by the notice. A borrower can also request a suspension or a modification because of financial hardship. For the review, the borrower will have to provide documentation, such as proof of yearly income, proof of the federal benefit, and a financial statement.
Revoke Your Professional License
Some states allow professional and vocational boards to revoke, suspend, or refuse to certify a license when the member has defaulted on student loan debt. This typically applies to attorneys, medical professionals, teachers, and state officers. The borrower may request a hearing with the board to review the potential action.
The Department of Education can sue to collect on a student loan default. Because a statute of limitations is inapplicable, the agency has no time limitations on collecting the debt.
If the borrower does not have enough valuable assets or a lawsuit would exceed the amount recovered from the debtor, the Department will most likely decide against suing the borrower.
Can the Government Take Your House, Other Property, or Your Inheritance?
The Department can collect from assets such as bank accounts and valuable property, and can place a lien on the borrower's real property. As a result of such a lien, the borrower may not sell the property until the lien is removed.
How About Private Student Loans?
Private lenders will come after you if you default on your private student loan in accordance with the Fair Debt Collection Practices Act (FDCPA). Some of the consequences of default include:
- Your failure to pay will be reported to the credit bureaus
- Lower credit score
- A lawsuit may be filed against you to garnish your wages or to take money out of your bank account
Can I Get My Loans Out of Default?
How you can get your loans out of default will depend on the lender. If you defaulted on a federal student loan, here are some of your options:
- Enter a loan rehabilitation agreement, which typically requires you to make a number of payments for a specific time
- Pay the full loan amount
- Apply for a consolidation loan
If you defaulted on a private student loan, the best option for you is to negotiate new repayment options with the loan holder.
Facing a Student Loan Default? Protect Yourself and Get Legal Help
While you may be unsure how you'll ever get out of student loan debt, you don't have to remain in the dark about the laws and your rights. Before your loans go into default, start a conversation with your loan provider and also seek the advice of an attorney who is experienced in bankruptcy and debt collections. Don't delay, talk to a bankruptcy attorney today.