What Happens if Student Debt is Unpaid?

Student loan debt is a significant issue for college graduates. With the college costs increasing every year, each graduating class finds itself facing bigger and bigger student loan payments, which get added atop of their other, equally urgent financial issues. One cannot blame the graduates for wondering if they should stop repaying their student loans altogether, or at least put off repaying for a while. However, doing so carries severe negative consequences that will hinder the borrowers' ability to get credit and generally conduct financial transactions.

Defaulting on a Student Loan

If the borrower fails to make student loan payments on time, he or she becomes delinquent. Delinquent borrowers should try to resume payments as soon as possible. If they fail to do so within 270 days of becoming delinquent, they will automatically default on their student loan.

Consequences of Defaulting on Student Loans

A borrower who defaults on his or her student loan will face a number of consequences. First and foremost, the default will reflect on the borrower's credit scores. This, in turn, will impact his or her ability to get a credit card, buy a mortgage or take out any kind of loan. The borrower will likely not be able to qualify for a loan he or she would otherwise be eligible for, forcing him or her to take out a loan will less favorable terms. Borrowers who default on their student loans are ineligible for any other forms of federal student financial aid. This state of affairs will persist until the defaulted loan is repaid in full. It should be noted that in addition to the monthly payments, the borrowers will have all the accumulated interest and late fees.

Another potentially severe consequence of defaulting on a student loan is the fact that the lenders may sue the borrowers to get the loans back. If the lender is a private entity, the local state law may restrict how much they will be able to sue the borrowers for, but no state has a law the prohibits it altogether.

If borrowers default on any federal loans, the US government has a right to recover the costs using the money generated through the borrowers' tax returns. Until the loans are repaid in full, the borrowers are ineligible for any exemptions they would otherwise qualify for.

Finally, private lenders and the federal government have a right to recover the money the borrowers owe them through wage garnishment. This will allow them to take the borrowers' paychecks and apply them towards debt repayment. The federal government has a right to do it whenever it wants, while private lenders have to get permission from the court. The borrowers will not get a cent of their salaries until the debt is fully repaired.

How to Avoid Defaulting on Student Loans

Borrowers can avoid defaulting on their loans by applying for deferment or forgiveness. The deferment postpones the payments for a certain period of time (usually a year). In order to be eligible, borrowers must either go back to school or demonstrate that they are facing economic hardship and/or unemployment. It should be noted that the interest will increase while the loan is deferred. The loan forgiveness, however, removes the loan payment obligations altogether. In order to qualify, borrowers must either work in eligible public service jobs/programs or volunteer with eligible eprograms that assist the needy.

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