What Are The Consequences Of Defaulting On Student Loans?

Borrowers of student loans fail to understand the consequences of not repaying their loans within the stipulated time period. There are different types of federal student loans that are offered and prominent ones include PLUS Loans, Direct Subsidized and Unsubsidized Loans, and Direct Consolidation Loans

Unless you pay off the loan, you must be prepared to face serious consequences because there are many ways by which the loan can be recovered from you. In this write-up, the topic has been discussed as under:

  •      Steps by federal government for loan recovery

  •      What are the lawsuits for loan recovery

  •      Impact of Collection Charges

Steps by federal government for loan recovery

Actions that can be taken by the federal government for recovery of loan include the following steps-
  •     The US Department of Education can garnish your income as much as 15% of it from the disposable pay of the debtor without having to produce a court order. Aside from this, it can also prevent your professional or occupational license from being renewed. 

  •      The US Treasury-

  •      Has the power to stop state and federal income tax refunds that you are entitled to compensate for the nonpayment of the loan. 

  •      It also has the power to intercept benefits from Social Security for disability and retirement as a means to make up for the loan that is delinquent.

  •      It can stop proceeds from state lottery winning

  •      You will not be able to avail further student financial aid in any form

  •     Most importantly, the delinquencies will be reported to the credit bureaus, which may cause your credit report and credit score to get impacted adversely. Since the credit report will show the negative aspects, you may not be able to get proper employment, an apartment, or rented premises of your choice.

What are the lawsuits for loan recovery?

If you have fallen behind on payments, the federal government can file lawsuit against defaulted debtors and seize their retirement accounts, brokerage accounts, and also bank accounts as a measure for not paying up the student loan amount on time. 

If your outstanding student loan amount exceeds USD$45,000 and you have fallen behind on the payment for more than 4 years, you are liable to be sued by the federal government. 

On the other hand if the outstanding loan amount is lower than USD$45000, you may be sued by private attorneys that are hired especially to deal with such cases on behalf of the federal government.

Impact of Collection Charges

The debtors that have defaulted on the student loans are also responsible for paying for the collection charges. As a rule, 20% of every loan payment on a delinquent student loan account will be taken away (deducted) as collection charges. 

The addition of the collection charges to the already existing debt burden has been seen to restrict the progress of the repayment of the delinquent loan accounts. For instance, if you could have paid off the loan within a period of let us say, 12 years will eventually take around 14 to 16 years of the collection charges are added on to the debt account. 

However, the interest amount will accrue over a period of time when there is nonpayment of the loan amount. In order to avoid these additional charges and pay more than you actually deserve to pay, it is best to prevent the loan account from being delinquent or default on the monthly payments.


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