The Truth Behind Defaulting on Your Student Loans
Recently, an article titled Why I Defaulted on My Student Loans was published in the New York Times. The op-ed piece discusses a far too common scenario that many students face after graduation. When confronted with the choice of attempting to repay his student loan debt or default on his student loans, the author, Lee Siegel, chose the latter. After spending more than 30 years in default, he explains how it is possible for someone to survive without repaying their loans. His tips for survival while avoiding collection include attempting to obtain numerous credit cards prior to default, paying your rent on time, and living with or marrying someone with good credit.
While Siegel claims that the consequences of default and poor credit are scare talk, the reality is not so simple — default can have a serious impact on a borrower’s life with real repercussions. So what does really happen if you are unable to make your student loan payment? And what steps are taken in collection? Outlined below are some of the consequences.
- Delinquency. Once a borrower misses their first payment they are considered delinquent. This is the first warning and red flag to the loan servicer, and should serve as major warning for the borrower. While a loan enters delinquency once a payment is missed, there is still time before the loan goes into default. For federal loans a loan does not enter default until it 270 days past due. It is best to be proactive if your loan is delinquent and seek alternatives to avoid default.
- Loss of Eligibility for Alternative Repayment Options. If you have federal student loans, a delinquent loan will not be eligible for other repayment options. In order to be eligible for more affordable plans, such as income based repayment options, you must rehabilitate your loan. Rehabilitation requires you to make nine monthly payments at an affordable rate. If successful, your loan will be brought current and then you can apply to switch plans.
- Credit Reporting. For federal loans, after 90 days of being past due a negative report will appear on your credit report and can lower your current score. A lower credit score may impact your ability to take out a new loan, mortgage, increase your interest rate, or even impact possible employment opportunities.
- Loss of Tax Refund. Should you default on your federal student loan, the IRS may directly apply any tax refund directly to your student loan payment. This process is automatic and one that can be particularly difficult for those relying on a refund.
- Wage Garnishment. Once in default, the government may automatically deduct a payment from your paycheck. If you have federal student loans, garnishment can happen without a court order and they may take up to 15% of your disposable income. A garnishment may remain in effect until the balance of the loan is paid.
- Legal Action. Eventually legal action can be brought against you for a defaulted student loan. Once in default the lender may move for a judgment from the court demanding full payment of the balance of the loan. If a judgment is obtained, the judgment may be attached to your bank account or used to garnish wages.
If you are facing the possibility of delinquency or unable to afford your payment there are number a steps you can take to avoid default. First, be sure to determine if your loans are federal or private as this impacts the options available to you. If you are unsure visit the National Student Loan Data System which will list only your federal student loans.
Next, explore your options with your lender or servicer. If your loans are federally backed you may be eligible for lower payments by switching to income based repayments. Though you’ll have to apply, with multiple options and broad requirements most people qualify for assistance. Private lenders may offer similar plans, though they are not required to.
Be sure to remain vigilant and protect yourself from collection violations. Just like any other debt collector, student loan collectors must comply with the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Massachusetts Consumer Protection Act, called Chapter 93A. A student loan collector who violates these may be required to pay you damages.
Finally, if you are still unable to keep the loan from default and collection, be sure to contact an experienced consumer protection attorney. If you’re sued for a student loan, a collector will be required to prove their case in court, and there may be a valid defense available to you.
Culik Law is a Massachusetts Law Firm. The posts on Culik Law’s blog are not intended as legal advice. If you have questions about your particular situation, CONTACT CULIK LAW for a Free Consultation.