When you don't pay or or you default on a student loan through a bank or other financial institution, the consequences are often the same as defaulting on any other loan. The consequences change a bit if you have loans through federal guaranteed student loan programs such as the Stafford, PLUS or the Direct Federal Loan Program.
Garnishments
Both private lenders and the federal government can sue you for the balance of your unpaid student loan. A private lender can garnish your wages as well as seize your state tax returns to use toward payment on your remaining student loan balance. If you default on loans through a guaranteed student loan program, the government or the financial institution that gave you the loan on behalf of the government can garnish your wages and seize both your state and federal income tax returns.
Liability
If you have unpaid student loans through a bank, credit union or other financial institution, you remain legally liable or responsible for the unpaid balance until you pay the loan off or until the statute of limitations runs out. The statute of limitation refer to how long a creditor can pursue you for your debt, including student loan debts. Statutes of limitation vary by state and range from three to 10 years.
Student loans through government loan programs are not subject to statutes of limitation. This means you will permanently remain legally liable for the unpaid balance of the loan.
Bankruptcy and Nongovernment Loans
You can include nongovernment student loans in your list of debts if you choose to file for bankruptcy. Once the bankruptcy court discharges your student loan debt in your bankruptcy proceedings, you are no longer liable for the unpaid balance.
It is important to note that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed existing bankruptcy laws. The new laws placed greater restrictions on the discharge of debts. So, even if you file for bankruptcy, your student loans may not be eligible for discharge. The court may then ask you to work out a repayment plan for the unpaid balance of your loan with the lender.
Bankruptcy and Government Loans
Student loans through government loan programs are not eligible for bankruptcy discharge. One exception to this rule is if you sustain a permanent disability after you received the loan to a point in which you are not able to earn an income. You must then file a Total and Permanent Disability Discharge application with the U.S. Department of Education to discharge your unpaid student loan. You can file an "undue hardship" motion with a bankruptcy court to petition to discharge of your student loans. U.S. bankruptcy laws are very strict and have a variety of income tests you have to pass for your student loan to qualify for discharge through undue hardship.
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