Default on Student Loans: The Negative Effects of Student Loan Default

According to the Department of Education, a total of 225,300 U.S. college graduates had no alternative but to default on student loans- this is the equivalent of 6.7% of all borrowers. Sadly, paying off student debt is not always achievable if suitable employment is not found.

Default on Student Loans

Ill health, poor employment prospects, relationship break-ups and financial difficulties are the main causes of student loan default. Unlike unpaid credit card debt and other unsecured sources of borrowing, student loans cannot be cleared with a debt relief solution, such as filing for bankruptcy.

Missing a single repayment could potentially lead to student loan default. Should repayment be missed for a period exceeding 270 days, the loan will go into delinquency status. This could affect the borrower’s employment status and credit worthiness in a number of different ways.

The Effects of Student Loan Default

  • Financial aid, deferments and student loan consolidation will no longer be an option.
  • All student loans in default are reported to the three major credit reference agencies (Experian, Equifax and TransUnion). This will show on a personal credit report for up to seven years.
  • The account may be passed on to a debt collection agency. This could lead to unwanted contact, further charges and even legal action. These additional costs will be added to the debt.
  • It will be far more difficult to attain other sources of credit, including mortgages and credit cards. However, there are still some bad credit unsecured credit cards available.
  • All future income tax rebates will be deducted directly from the money owed.
  • Up to 10% of net wages can be garnished each month through an earnings attachment.
  • Default on student loans could make a college graduate ineligible for employment in certain city, county, state or federal agency positions. It can also result in removal from an existing post.
  • Student loan debt cannot be discharged through either chapter 7 or 13 bankruptcy apart from in very exceptional circumstances. It would be necessary to prove that the ability to earn a decent income had been affected indefinitely.
  • A professional employment license could potentially be revoked.

Whilst default on student loans certainly isn’t uncommon, it is important to take all reasonable steps to avoid it. If student loan debt is unmanageable, it is important to consult a non-profit debt counseling service as soon as possible in order that the issue of paying off student debt can be addressed.