Consequences of Defaulting on Your Student Loans

The statute of limitations for private student loans is decided at the state level, meaning you may reach the point where your lender can no longer take legal action to recover the loan amount. However, the debt may be sent to a debt collection company.

Keep in mind that the loan will stay on your credit report for seven years from the first delinquency date, which may create problems in other areas of your life.

1. Late fees

If you’re 30 days late on federal student loans, you’ll typically encounter a late fee of up to 6% of the amount that was due and unpaid. So if you owed a late payment of $350, you might have to pay up to $21 extra on top of your existing student loan payment.

Private student loans have similar late fees but aren’t standardized. In this scenario, you’ll either pay a predetermined percentage or a flat fee loans with bad credit, whichever is higher.

2. Lower credit score

After a certain number of days, a lender can report the issue to credit bureaus, which can adversely affect your credit score.

This can impact your life in several ways, including making it more difficult to qualify for credit cards, buy a car and get a mortgage.

Loan services will report your late payments to credit bureaus when you’re 30 days past due for private student loans and 90 days past due for federal student loans.

3. Lose loan benefits

You’ll also no longer be able to choose your repayment plan and may have to shift to an income-driven repayment plan instead.

4. Wage garnishment

With wage garnishment, a lender can withhold up to 15% of each paycheck to collect on your federal student loan without taking you to court. In the case of private student loans, garnishments may equal up to 25% of your wage. They can continue to do so until your student loan has been paid in full or you remove it from default.

Note: Collection agencies are currently prohibited from wage garnishing due to the COVID-19 student loan relief effort. This is in effect through at least .

5. Negatively impact credit

We already mentioned that late payments can hurt your credit score. But going into default only worsens the issue and can send your credit score plummeting even further.

6. Withhold your tax refund

Some states also have laws in place where state guaranty agencies are allowed to take your state income tax refunds as well.

Note: Collection agencies are currently prohibited from wihtholding a borrower’s tax refund due to the COVID-19 student loan relief effort. This is in effect through at least .

7. Cosigner becomes involved

It can also negatively impact the cosigner’s credit, and they may find it more difficult to qualify for future loans or refinance existing ones.

Cosigners are quite common in the case of private student loans. But, a cosigner might not realize what could happen if you don’t pay your student loans.

8. Social Security payments garnished

Known as Social Security garnishment, the government can take up to 15% of your Social Security benefit. While this doesn’t apply to private student loans, this is something you should definitely be aware of for federal student loans.

Note: Collection agencies are currently prohibited from garnishing Social Security benefits due to the COVID-19 student loan relief effort. This is in effect through at least .

9. Lien on a property

“In almost every case, the borrower loses,” explains CNBC reporter Abigail Hess. “If the government wins, they can place a lien on your home and even force a sale.”


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