Student Loan Default: A Complete List Of Horrible Consequences That Arise When You Let It Happen
Quick! Write this on your bathroom mirror:
I will not default on my student loans. I will not default on my student loans.
- See also: How To Legally Get Out Of Paying Back Your Federal Student Loans To Avoid Defaulting Or Bankruptcy
Actually, write it down all over the place, and burn it deep into your brain. Why? Because if you learned absolutely nothing from your college education, at least retain this:
Defaulting on your student loans is one of the worst possible things you can do for your future well-being, personal finances, and reputation. Period.
Student Loan Debt Taking Over America
According to projectstudentdebt.org, 71% of all students graduating from 4-year colleges in the U.S. in 2012 had student loan debt. And, as recently pointed out by Mother Jones, the cost of going to college has risen 12 times for Millennial Americans compared to what the previous generation paid for school. At this point, it would safe to say that student loan debt in the United States is officially a catastrophe.
In fact, student loan debt has become so out of control that it now surpasses the total amount of credit card AND auto loan debt in the United States. To make matters worse, the lingering effects of the Great Recession have continued to create a horrible job outlook for graduates, which in turn has pushed millions of Americans to make the tragic decision of defaulting on their student loans.
And as you’ll see below, there are few things in America that have such drastic negative consequences – both personally and financially – as defaulting on your student loans.
Defaulting On Student Loans = Nightmare
Ever since the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law, there are absolutely no types of student loans – neither government nor private loans – that can be discharged by simply filing for bankruptcy. In other words, even if you file for bankruptcy in a desperate attempt to get rid of your student loan payments, it will not work 99% of the time.
(In fact, filing for bankruptcy can actually cause MORE problems when combined with student loan default – but that is a topic best reserved for another article.)
If you are late making your Direct loan monthly payments, your loan will be considered to be delinquent. Delinquencies on your Direct loan payments are reported to national credit bureaus after being 60 days late. After 240 days of being delinquent, the entire loan, including interest, becomes due immediately and in full. Loan default occurs after one is 270 days late. Having defaulted on your loan means that you have abandoned your responsibility to repay the loan.
Below is an exhaustive list of negative consequences that can happen to you as a result of defaulting on your federal OR private student loans:
- Lose Your License/Job: Believe it or not, if you hold a job that requires a professional license, defaulting on your student loans could force you to give up your license, and therefore, lose your job. Take for instances, these 42 nurses who were suspended in Tennessee for failing to setup proper repayment plans. In some states, like Montana, even your driver’s license could be suspended.
- Wage Garnishment: One of the least fun possible consequences. The federal government (IRS) can garnish (take out) up to 15% of your salary or income (disposable wages) for as long as is necessary to satisfy your loan default. In general, this is usually treated as a last resort, which is why its so important for you to request a deferment or forbearance, or other form of loan payment reduction. If you fail to do so, the feds could track you down even 3 decades later and empty your bank account.
- Tax Refund/Benefit Seizure: Not only can the IRS withhold your federal tax refunds and apply them toward your student loan debt, but they also have power to without your STATE tax refunds as well. Other government benefits such as social security or disability payments can also be withheld while your debt is outstanding – which can be a disastrous situation for middle-aged Americans.
- Destroyed Credit Score: Ignoring your student loan payments will result in an increasingly horrible credit score. First, your late payments will be reported to credit agencies after 60 days. Then, if you default, you will be reported again and your credit score will drop even lower. Add wage garnishment and other punishments, and your credit score will all but crash. And in a country where “credit” pretty much defines you as an individual, the side effects could ruin your entire future.
- Harassment By Collectors: Debt collection agencies are ALL the same, regardless of what type of debt they are going after: aggressive, annoying, and relentless! If you suddenly stop paying you student loans, which eventually becomes default, your loan servicer (i.e. Sallie Mae) will report you to credit bureaus AND collection agencies in an attempt to recover the funds. These agents will call you and email you and your family members without end, and may even show up at your home or workplace.
- Employment Difficulty: In a sort of Catch-22, while not having a job may cause college graduates to default on loan payments, defaulting will likely impair future job prospects. Firstly, because many employers check your credit report as part of a background investigation, but secondly, because many jobs specifically prohibit the hiring of applications who have defaulted on student loans, especially jobs related to government agencies that require a high level of trust and security.
- Ineligible For Financial Aid: Technically speaking, the fact that you have defaulted before is not supposed to influence your ability to qualify for more federal student loans. In practice, though, your credit score SINCE having defaulted can be taken into account by private lenders, and in any case your default must be resolved. By the time you’ve defaulted, you will also have disqualified yourself from simply filing for a deferment or forbearance (etc) on your loan payments!
- Witheld College Transcripts: In recent years it’s become more common for the federal government to support, and even encourage, colleges from distributing your transcripts if you are currently in default on your student loan payments.
In conclusion… DO NOT default on your student loans! (Try this instead)