When money is tight, skipping a payment or two on your federal student loan may seem like your only option. But if you do miss a payment, your student loan will be marked as delinquent until you catch up. For most federal student loans, if you have not made a payment in 270 days (that means you’ve missed 9 payments), then you will default.
If you default on a federal student loan, the consequences can be extensive:
• The entire balance will become immediately due for payment, including any interest and late fees you owe.
• Your debt may be assigned to a collection agency.
• You will lose eligibility for additional federal student aid.
• The loan will be reported as delinquent to credit bureaus.
• Your federal and state taxes may be withheld through a tax offset.
• Your student loan will increase as late fees, additional interest, court costs, collection fees, attorney fees and other costs are added to it.
• The federal government may request that your employer withhold money from your pay check through wage garnishment.
• The loan holder may take legal action against you.
• If you are a federal employee, you may have 15% of your disposable pay offset toward repayment.
• It could take years to reestablish your credit.
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Although any loan delinquency may impact your credit rating, defaulting on a student loan has additional consequences as well. Here are four that you should expect:
1. You May Owe More than Just the Principal and Interest on Your Loan
Once you default on a federal student loan, the entire balance, which includes principal and interest, may become due in a single payment. Once your loan is “accelerated,” the holder of your loan may send it to a collection agency. If that happens, any costs incurred to obtain payment will be your responsibility as well. If the debt holder decides to take legal action, you may not be able to buy or sell real estate, and you may also be responsible for attorney fees and legal costs.
2. Your Credit Score May Plummet
If you default on a student loan, your financial institution will share the news with the major credit bureaus. They’ll add this information to your credit report, which can impact your credit score significantly. With a lower score, you might find it more difficult to get a car loan or a mortgage. And if you do get such a loan, you may be charged additional interest than you would if you had not defaulted on your loan. A low score can also make it more difficult to obtain goods and services that check your credit, such as a cell phone plan or even a lease on an apartment.
3. You'll Lose Eligibility for Services and Additional Student Aid
Various services are available to help people pay back their student loans, but they'll no longer be available to you after you default. This includes deferment and forbearance plans that may enable you to delay payments while you are experiencing financial difficulty (although the interest may still continue to accrue). You'll also lose access to any repayment plans that could help you during times of low income or unemployment. On top of that, you will no longer be eligible for additional federal student aid.
4. Your Wages Can Be Garnished
The U.S. government can ask your employer to begin garnishing your wages if you default on a federal student loan. This means a portion of your weekly pay will go to the government to pay your student loan debt before you ever see the money. If your employer happens to be the federal government itself, it can hold back up to 15 percent of your wages. In addition, the IRS and your state taxing authority may take any tax refund you are eligible for to collect on your defaulted student loan debt.
How to Avoid Default
The consequences of defaulting on a federal student loan can impact your financial health in many ways. If you think you might have to miss a payment, you should consider your other options. Depending on the terms of your loan, you may be able to:
• Change your repayment plan to get lower monthly payments.
• Apply for a payment plan based on your income.
• Change your monthly due date to better align with the days you get paid.
• Get a deferment to postpone payments for up to three years while you get back on your feet.
• Get a forbearance allowing you to delay payments for up to 12 months.