What Happens if You Default on Student Loans (It’s Not Pretty)

When you miss a payment, your student loan goes into delinquency. If you don’t make that missed payment within a certain number of days, your student loan will enter a default status. Federal student loans enter default when the payment is 270 days past the due date. Private student loans enter default after 3 missed payments or when the payment is 120 days past the due date.

Defaulting on your student loans has several severe consequences. Here’s what happens if you default on student loans.

9 Consequences of Defaulting On Student Loans

A person holding a brown empty wallet.1. The entire loan balance will become due immediately

When you default on your student loans all other payment arrangements become invalid immediately. That means, the 10 or 20 year payment plan you had agreed to no longer holds good. Instead, the loans that fall into default will become due in their entirety immediately. This includes the principal and the interest.

2. Your loans will be reported as delinquent to credit agencies

When your student loans go into default, your provider will report it to the credit agencies. This will get noted in your credit report and will also impact your credit score.

Your loan payment history has the biggest positive or negative impact on your credit score. A student loan default will lower your score by several points. This can be very difficult to recover from. The longer your loans are in default, the more damage it will do to your credit score.

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3. Student loan default stays on your credit report for 7 years

Default reports stay on your credit history for up to 7 years after the outstanding has been paid. You’ll find it difficult to get a credit card, mortgage or auto loan during this time. This is because lenders are reluctant to loan money to applicants with bad credit.

4. Your loans may be turned over to a collection agency

Most lenders don’t chase borrowers for outstanding payments. They hand over that responsibility to collection agencies. These agencies are notorious for the tactics they use to collect overdue payments. Once a collection agency is involved, you’ll be liable for paying their fees too.

5. You’ll have to pay huge fees

Lenders impose steep late payment fees plus interest on outstanding dues. In addition to these fees, you’ll also have to pay attorney fees and court costs if the lender sues you for collections. If a lender goes this route, they will use for the entire amount of the loan.

6. You may not be able to renew your professional license

What happens if you default on student loans is you risk losing any professional license you hold. Even if you don’t lose it outright, you won’t be able to renew it. The license will become invalid after the renewal date. This can make it very difficult to find good employment even if you’re qualified and experienced for the role.

7. Your income may be garnished

Lenders will try any and all tactics to get their money back. Some will inform your employer of the loan default. Your employer could garnish your income and other perks. Your retirement benefits could also be at risk.

8. You’ll be ineligible to enlist in the Armed Forces

With a student loan default on your record, you’ll have to give up any dreams you have of joining the Armed Forces.

9. Your cosigner’s credit history is at risk

This only applies if you took the loan with a cosigner. When you default, it goes on both credit reports – yours and your cosigner’s. This will damage your cosigner’s credit score for no fault of theirs.

On top of all the consequences, you’ll still owe the lender the full amount that you owe. There’s no getting around that. Also, you can’t discharge student loans through bankruptcy.

5 Additional Consequences Of Defaulting On Federal Student Loans

In addition to the above, there are a few additional consequences that apply only to federal student loans.

  1. The federal government may withhold part of your Social Security benefit payments.
  2. Your federal and state tax refunds may be withheld.
  3. You’ll be ineligible for federal repayment flexibility. That means you won’t be able to choose any of the income-based repayment plans (this option is available only as long as your loan isn’t in default)
  4. You won’t be eligible for subsidized interest benefits or any other assistance under most federal benefit programs
  5. You won’t receive any more federal financial aid until such time that you repay the loan in full.

How To Avoid Defaulting On Student Loans

Unfortunately, thousands of student borrowers default on their loans every year. These are some of the common reasons for student loan default.

Don’t wait till you reach a point that you have no other option but to let your student loans go into default. You’ve seen how serious the consequences can be.

Use these tips to avoid getting into this dreaded scenario.

Take advantage of options before it’s too late. If you think you may have trouble paying your student loan payment, call your loan provider. Ask about forbearance, deferment, or other payment options before your account goes into default. Once your account goes into default, you’ll lose these options. Don’t wait to ask for help.

Try paying off your student loans early. Using any extra money you have to pay off your loans early reduces the risk of default. But there are a few downsides to this option. Understand the pros and cons of paying off student loans early.

Consider refinancing if your payments are too high. If you have recurring issues with making your student loan payments, consider refinancing to lower your monthly payments.

Set up automatic payments to reduce the odds of missing payments. When you set up auto pay, your loan payments will be transferred from your account to your lender’s account by the specified due date. You don’t have to set due date or payment reminders. This reducing the odds of missing payments and getting into default.

What happens if you default on student loans can have a number of serious compensations. The tips mentioned will help you stay on top of your loan payments and avoid the dreaded default. Get more tips on how to prevent student loan default.