Student loan debt is a serious problem that just keeps getting bigger. It now stands at a record $1.5 trillion.
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What’s more: it’s not getting any easier for Americans to pay back the debt. Analysis from the Brookings Institution suggests that by 2023, nearly 40% of borrowers may default on their student loans.
“People from all walks of life are defaulting on their student loans, affecting them for years to come,” says Jeremy Wine, supervisor of student loan counseling services at Take Charge America. “Paying student debt must take top priority.”
Wine details the ramifications of defauting on your student loans:
Payment is due in full
Technically, you are delinquent as soon as you miss a monthly payment. If you have a federal student loan, once you are 270 days or nine months past due, in most cases your lender will declare the loan to be in default. Wine says when you default on a student loan; it accelerates payment – meaning the lender can ask for the loan to be due in full. Most people can’t pay the loan in its entirety because of their income and/or the balance of the loan. If you are in default, he says you should contact your lender immediately to go over your options: either loan rehabilitation or loan consolidation. You can also reach out to a nonprofit credit counselor for help. After your loan goes into default, you lose opportunities such as federal forgiveness programs, deferment, forbearance or alternative repayment plans.
Hefty collection costs
In addition to what you owe for the student loan, collection costs will be added to the balance. Wine says while collection fees vary, they can range from 20% to 40%. He says for some loans; the costs can be discounted with loan consolidation or rehabilitation.
Your credit score will take a hit
Defaulting on a student loan will negatively impact your credit score. One of the biggest pieces of your credit report is your payment history. A payment that is 90 days late is reported to the credit bureaus and dings your score. He says the delinquency can stay on your report for about 7 years. Once you hit 270 days or 9 months past due, there is a default notice placed on your credit report. The default will stay on your report until you rehabilitate the loan.
Your wages & tax refund may be garnished
Your tax refund and wages are in jeopardy if your student loans are in default. Wine says normally you have to be in default for about a year or so until you will be subject to a “tax offset." A tax refund offset means that the U.S. Treasury has reduced your federal tax refund to pay for an unpaid debt. If you are married and filed your taxes jointly, they can garnish your spouse’s refund as well. After doing that for 1 to 2 years, he says a wage garnishment can be put in place. The money will be taken out of your check until you set up a repayment or rehabilitation option.
Lenders, landlords, and licenses, oh my!
Defaulting on your student loan can significantly impact your livelihood. Not only does it damage your credit; but it also makes it hard to secure a mortgage or rent an apartment. Employers often look at an applicant’s credit history to decide whether or not to hire them. Wine says some licensed professionals such as doctors, lawyers, and teachers have also reported having their licenses revoked or suspended because their loan was in default.
“It’s best to deal with it immediately,” says Wine. “I know it’s really challenging because student loan debt is so high and it’s really unmanageable for some borrowers, especially when they are placed in a standard repayment plan. But ignoring it and not doing anything about it is one of the worst things to do.”
Linda Bell joined FOX Business Network (FBN) in September 2014 as an Assignment Editor. She is an award-winning writer of business and financial content. You can follow her on Twitter @lindanbell.