If you’re struggling to pay your student loans each month, one of the worst things you can do is to do nothing at all. Student loans won’t go away and federal loans have no statute of limitations, so they will inevitably catch up to you. It’s best to be proactive and request a deferment or forbearance if you can pay nothing, or to apply for Pay As You Earn or Income Based Repayment if you can afford to pay some – but not all – of your monthly due. If, instead, you choose to simply not pay and not take any other preventative actions, the result will be default if you fail to make any payments for 270 days. Here’s what you can expect after you are officially considered to be in default:
#1 Tax refunds and benefits seized
If you are in default, the IRS will hold on to your tax refunds and apply them to your loan balance up until your loan balances are paid off or you cure your default. It’s not just your federal refund that can be seized, either – the government can also snag your state refund if you live in an area where you’re subjected to state income taxes. In addition to losing your tax refunds, certain federal benefits can be co-opted to cover your debts including social security retirement and disability benefits. This can be financially disastrous if this limited income is your sole source of income.
#2 Wage garnishment
Up to 15% of your disposable wages can be garnished by the Federal Government to satisfy your defaulted student debts. As with refund and benefits seizure, this can continue until your loans are paid in full or until you cure your default. This is what the government considers a “tool of last resort” because they would prefer not to garnish you, but they will if you make no attempt to make even partial payments or to apply for deferment or forbearance to demonstrate your inability to pay your student loan debts.
#3 Your credit will take a big hit
Not only will late student loan payments and a default negatively impact your credit score, but if you’re garnished, this will be reported to the three big credit agencies and it will lower your score even more. If you allow your student loans to go into collections, your credit can drop 60-80 points. A default can lower your credit 80-100 points. A drop this big can affect how much you pay for auto insurance, require you to pay more for utilities or be required to put down a large deposit to obtain services.
#4 Harassment by student loan collectors
Debt collectors aren’t paid to be nice and so they never are. In fact, once your student loans go into collections, it will likely become a nightmare. If you have more than one loan servicer, expect calls from representatives for each of these. Expect calls to come frequently, even on a daily basis. Expect them at home and at work. If you don’t take the calls, expect them to call the people you listed as contacts and references on your loan documents.
#5 Loss of security clearance or job opportunities
Not having a good-paying job can be a barrier to paying your student loans but, ironically, not paying your student loans can be the very thing that prevents you from getting a good job. These days, many employers check your credit as part of the pre-employment screening and you could see a great offer evaporate because of student loan delinquency or default. And if you’re considering a job that requires a security clearance, past-due student loans can be a barrier to getting and keeping the clearance you need.
To keep track of your student loans, sign up for Tuition.io’s free student loan tool. Be sure to read our blog frequently for tips on dealing with your debt. And if you’re struggling, check out our Student Loan Help Center for information on deferment, forbearance, IBR, PAYE and How-To Guides on applying for these programs.