Student loan default

Defaulting on a student loan in the United States can have a number of negative consequences. To understand loan default, it is helpful to have a few common terms defined:

Defaulting on a loan can adversely affect credit for many years. Default typically occurs when a loan receives no payment for 270 days. The loan leaves repayment status and is due in full when the lender requests. New collection costs are added to the loan’s balance and the loan becomes drastically more expensive or eliminated through negotiation or legal action.

There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.

Individuals who are worried that they are unable to service their student loan debt should receive advice and counseling. There are few options available for American students other than payment in full. The Bankruptcy Abuse Prevention and Consumer Protection Act makes discharging student loans through bankruptcy virtually impossible. Critics have noted that this lack of bankruptcy protection for consumers results in a "risk-free" loan for creditors, removing pressure on creditors to negotiate lower payments.

In addition, the IRS can take the borrower’s income tax refund until the defaulted loan is paid in full. This is a popular way of collecting on loan debt, and the Department of Education collects hundreds of millions of dollars this way.

To object, a written statement must be presented within 65 days of the IRS’ notice, and must give evidence of any of the following:

The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education or a Student Loan Guarantor can garnish 15% of a defaulted borrower’s wages. The loan holder does not have to sue the borrower first. The borrower can object to the garnishment, but only under very specific circumstances, such as if his weekly gross income is less than equivalent to 30 hours at the federal minimum wage (currently $7.25/hr x 30 hrs = $217.50).

Defaulting on student loans can also end in a lawsuit. The government and private lenders can sue in order to collect on loans. There is no time limit on suing to collect on federal student loans, and the borrower can be sued indefinitely. Private student loans, in most cases, are subject to statute of limitations laws depending on the state.

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Wikipedia