The consequences of defaulting on a student loan --- whether it's a government-backed loan or a private loan --- can be substantial and long-lasting. Not having the money to pay or being unemployed usually isn't a good enough reason to have your loan forgiven or discharged, although there are exceptions. The typical avenues pursued by lenders and the government in cases of student loan defaults include wage garnishment, tax return confiscation, lawsuits and collection agency involvement.
Types of Student Loans
Education loans are types of financial aid to help students pay for college expenses. Loans must be repaid with interest, as opposed to scholarships, which don't have to be repaid. According to the website "FinAid," as of 2010, more than 90 percent of the dollar amount of student loans in the United States --- about $100 billion --- originates through federal student loan programs, with about $10 billion provided by private lenders. Although the government has more tools at its disposal to collect delinquent student loans, private lenders have ample ammunition for collection purposes.
Government Loan Defaults
According to the website "Student Loan Borrower Assistance," consequences and options regarding student loans depend on the situation --- whether you're delinquent on a loan or actually in default. Delinquency occurs once you fail to make a payment on time. Nine months of nonpayment results in default. Lenders will contact you, usually by mail, once you become delinquent. This is the time to contact your lender to try to work out an alternative payment plan. Once in default, according to FinAid, consequences may include your account being turned over to a collection agency, with subsequent responsibility for associated court costs and lawyer fees; the inability to receive further financial aid until the loan is repaid; being sued for the loan's entire amount; your credit score and history being marred for up to seven years; wage garnishment, up to 15 percent of take home pay on federal loans; income tax returns, both state and federal, being intercepted; a portion of social security benefits being withheld; denial of professional license renewal; and prohibition from the military.
Private Loan Defaults
Many of the same collection tactics available to the government also are employed by private loan lenders, although private lenders must first obtain a court judgment before measures can be taken. Time limits to bring suit for a student loan delinquency or default vary among states from five to 20 years, according to Student Loan Borrower Assistance. Most states also allow creditors to continually renew suits, effectively providing an infinite window of opportunity for collecting. Wage garnishment, collection agency involvement and judgments for the entire amount owed are standard collection tactics.
Default Prevention & Payment Options
Once you receive a delinquency notice, every effort should be made to contact the lender who holds the loan to make alternative payment arrangements to avoid default. Options include deferment and forbearance, both of which provide negotiated repayment time periods, usually one year at a time. Scenarios in which forbearance or deferment may be granted include poor health, the inability to pay within the maximum repayment term, personal problems and monthly student loan obligations that total more than 20 percent of monthly income. A loan also may be canceled or discharged through bankruptcy proceedings, although such an option has gotten progressively more difficult to execute since 1978, when federal exceptions to student loan discharges began to be added to the U.S. Bankruptcy Code. Section 523(a)(8) states that "student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents," according to the website Bankruptcy Law Network.
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