What are the Consequences of Defaulting on a Federal Student Loan?

Defaulting on a federal student loan comes with negative consequences that should be avoided if at all possible.   

What are Federal Student Loans?

When reviewing the loans that you have taken out to help pay for your education, it is important to know which ones are Federal student loans.  The most common Federal student loans are called Stafford, Perkins, or PLUS Loans.  Federal student loans tend to have lower interest rates and better general terms and repayment schedules but the risk of defaulting on a Federal student loan is present if you have trouble making the payments.  By understanding these loans you will be able to try to avoid the consequences of defaulting.  The loan is considered to be defaulted after 270 days if the payments are supposed to be made monthly and after 330 days if the payments are supposed to be made less frequently than monthly.

The Short and Long-Term Consequences of Defaulting on a Federal Student Loan

After you have defaulted on a Federal student loan, the U.S. government will have access to your personal funds in rather unpleasant ways; their goal is to recover the money that they lent to you and they have invasive ways of ensuring that this happens.  The Department of the Treasury may access your federal and/or state tax refunds and use this money to repay the defaulted loans.  You may become subject to the Administrative Wage Garnishment; in case of this happening your employer will be required by the Department of Education to give 15% of your disposable income toward the repayment of the student loans.  If you are a federal employee you may face a similar extraction of income through the Federal Employee Salary Offset Program which takes 15% of the delinquent borrower’s disposable income.  The Department of Education will also be legally able to take legal action against you in order to force you to repay the loan or loans.

The Consequences for Your Credit

Defaulting on a Federal student loan can be dire to your credit rating.  After you default, the Department of Education may notify credit bureaus of your delinquency thus greatly hurt your credit rating.  With a bad credit rating you will have more difficulty getting a credit card, buying a car or a house.  This is not only a nuisance but truly a negative consequence of defaulting on a Federal student loan.

How to Avoid Defaulting

The lender of your Federal loan may be able to help you change the parameters of your loan, making the payments lower and the terms more acceptable to your current situation.  While the Federal government greatly desires the repayment of the loan, they certainly prefer for the payments to come from you willingly and not after defaulting and they will help you do what you need to ensure that this happens.  Similarly, some professions may be eligible for Federal student loan eradication; it would be worthwhile to check with your lender to find out if you qualify.


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