The Consequences of Student Loans In Default

According to the Department of Education, the number of student loans in default now stands at 225,300 - that's 6.7% of all federal loans. The consequences are not only catastrophic for the college graduate, they could even damage the institution. Secretary of Education, Arne Duncan, stated that schools with an excessively high student loan default rate could find that they become ineligible for federal student aid programs in the future.

The Causes of Student Loans In Default

In the current economic climate, the likelihood of finding work has been reduced. Without a decent income, it's hard enough to cover the cost of living, let alone pay for college tuition and expenses. Life is full of surprises so unemployment isn't the only threat facing graduates. There's also the very real threat of poor health, relationship break ups and money problems caused by unexpected life events.

The Effect of Student Loans Default

Non-payment will be reported to the three credit reference agencies, Experian, Equifax and TransUnion. This will make it far more difficult to obtain credit in the future, including mortgages, credit cards and loans.
A student isn't legally able to eliminate debt by filing for chapter 7 bankruptcy. It would be necessary to prove that you are likely to remain on a very low income for an indefinite period of time due to an illness or accident. Extreme financial hardship would also need to be proven.
Up to 10% of each monthly salary can be garnished via an earnings attachment.
The majority of student loans in default will be passed to a debt collection agency. This is likely to lead to creditor contact and legal action. The costs will be added to your debt.
Future tax rebates will no longer be received by the individual, they'll be deducted from the loan.
Failing to make student loan debt repayments could be a bar to working in some city, county, state or federal agency positions. It can also lead to the loss of employment.
All forms of financial aid, deferments and student loan consolidation will no longer be available.

The consequences of student loans in default is very serious. Although non-payment will be registered with credit reference agencies after just one missed payment, the account isn't considered delinquent until 270 days have elapsed. It's important to seek guidance and assistance from a non-profit debt counseling service if you suspect that you're likely to find it difficult to keep up with the repayments.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.

Updated: 30 April 2011

Sources:

Lewin, Tamar. (September 14, 2009) "Student loan default rate rises." The New York Times.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.

Updated: 30 April 2011