So your student loans have entered default status. Now what? First, you need to start the path to financial recovery by understanding the consequences of going into default on your student loans.
Consequence #1: Your Credit and Overall Financial Standing
The first impact of having a student loan on default status is to your credit score. Student loan providers report to all three major credit agencies (Experian, Equifax, and TransUnion). By moving into default, your credit score within all three credit agencies will likely drop. This means that for major life moments — such as buying or renting a house, purchasing or leasing a vehicle, and receiving competitive offers for credit cards — will be more challenging.
The understanding of how difficult this could be is broken up into two key pieces of understanding. First, it is now more difficult to qualify for higher-value loans that you may need for larger purchases. Second, the loan you could be accepted for will have much higher rates than before defaulting on your student loans.
If you have more questions or want to learn more about credit scores and financial aid misconceptions, read more here.
Consequence #2: Cannot be Protected by Bankruptcy
Student loan debt is the few types of debt which is shielded from bankruptcy. Thus even if you file bankruptcy, it will not alleviate or eliminate your obligation to pay back these loans — whether private or federal loans. Ultimately you will have to pursue an option to get your loans under control and create a lower required payment to start building towards exiting default and a better financial standing.
It is important to note that it typically takes about 10 months of consecutive (on-time) payments to have the student loan exit default status.
Consequence #3: Garnished Wages & Seized Tax Returns
If your student loans are on default status then the loan providers can take one of two areas of recourse. First, they can begin to garnish your wages. The US Department of Education, or any organization trying to collect for this department, can impose an “Administrative Wage Garnishment” (AWG). This can be done without a court order or judgement. The wage garnishment for being in default of your student loans can be in an amount up to 15% of your gross income. However, it cannot be more than what is 30 times the minimum wage federally.
This means your net monthly income will be reduced greatly and you will have to adjust your standard of living. Additionally, the loan provider can ensure that you do not receive a tax refund and seize whatever funds you may get during refund season.
Consequence #4: Cosigner Trouble
You need to check if there is a cosigner on the loan that is in default immediately. You can find out through your service provider’s online portal or by calling. Once you know who is the cosigner, it is vital you communicate the loan is in default and do so in writing. Additionally be sure to outline the steps you are taking in order to get the loan out of default and be open to discussing or staying in communication with the cosigner.
Now it is vital to begin to understand how to get yourself out of default. Use this as a starting guide to move forward and pursue your options.