The Consequences of Student Loan Defaults

Avoid a Loan Default

Educational loans may be placed in default status if the borrower does not make scheduled loan payments or otherwise honor the terms of their loan agreement or promissory note.

Serious Consequences of Loan Default
When a FFELP educational loan is defaulted, the holder of the loan files a claim with the government to collect the funds. Then, the U.S. Department of Education and the guaranty agency take charge. The government notifies all national credit reporting agencies and the situation becomes increasingly serious. At this point:

• The loan default becomes part of the borrower's permanent credit history and may affect their ability to buy a car or home, get a credit card, or finance a business. It should be noted that there is no statute of limitation on student loans, so the loan is collectible indefinitely.

• The government assigns the loan to a collection agency. The borrower is still responsible and owes the entire unpaid amount of the loan, including interest, and this amount may become due and payable immediately.

• To replenish government funds, the IRS may seize the borrower's property, garnish their wages (if allowable under the laws in the state where they live), sue the borrower and make them pay court costs and attorney fees, deduct the loan amount from federal and state tax refunds as well as state lottery winnings.

• The borrower may be ineligible for future educational aid, as well as deferments, forbearances, and loan consolidation on other educational loans that they may already have.

• The schools the borrower attended will hold their academic transcripts as long as they are in default, which could prevent them from finishing their degree.

In addition, if the borrower is married and lives in a community-property state, these actions may affect their spouse as well.