Defaulting on student loans: Don't do it!

By Jeremy Simon

Student loans are a valuable tool, helping many Americans pay for an education that might otherwise be difficult to afford. However, if not paid back, defaulting on a student loan can end up hurting a recent graduate badly, including leaving them with bad credit.

When default occurs on a student loan, payment in full becomes due immediately, with no further eligibility for any sort of deferment or forbearance. If the borrower continues to fail to make payment on a loan in default, a number of negative consequences may result.

Among the most damaging consequences of defaulting on a student loan is damage to the borrower's credit. People who fail to repay their student loan could end up with bad credit.

Having bad credit makes it harder to get a loan, such as for that new car, as well as to secure a place to live, since many landlords check credit histories. Also, bad credit can impact the graduate's chances of landing a job, possibly undermining one of the main reasons for seeking higher education in the first place.

Since consumer reporting agencies are able to report an account for seven years from the opening date, bad credit that results from defaulted student loans can follow borrowers around for quite some time, costing them money all the while due to higher interest rates on credit cards and other loans.  

Being in default on a student loan can also cost the borrower the money they still owe on the loan, as well as a collection fee to a loan guarantee agency and the commission collection agencies charge to the Department of Education, which then gets passed on to the borrower.

Additionally, in one of the most frequent methods of collecting of defaulted loans, the IRS can intercept any income tax refund the borrower may be entitled to until their student loans are paid in full. Furthermore, the Department of Education and student loan guaranty agencies are authorized to take up to 15 percent of the wages from someone who defaults on their student loan.

And that's not all. Under the Debt Collection Improvements Act, the government can take a limited amount of federal benefit payments to pay back certain federal debts, including student loans. Finally, the Department of Education can sue borrowers who default on their student loans.

But there are options to restore the borrower's credit to a least some degree. Borrowers can do this by repaying or satisfying the loan in full, consolidating the loan via the FFEL loan consolidation program or the William D. Ford Direct Loan Program, or rehabilitating the loan using the U.S. Department of Education's loan rehabilitation program.

Published: July 19, 2007

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