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Most federal student loans default when the borrower fails to make payments for 270 days (nine months). Private loans may have different terms; they may default if you miss just one payment. Read your loan contracts carefully to be sure you understand when you're at risk for defaulting -- then do all you can to avoid it.
The following lists should convince you that defaulting on your student loans can lead to overwhelmingly negative consequences.
Student Loan Default: Consequences and Penalties
If your student loans go into default, here are some of the difficulties you may face:
- Your full loan balance, including interest, will be due immediately. (This is called "acceleration.")
- Your loan will be assigned to a collection agency, and fees will be added to the balance of your loan.
- Your loan debt will further increase because of late fees, added interest, court costs, attorney fees, and any other expenses incurred during the loan collection process.
- You will no longer be eligible for loan deferment, forbearance, or flexible repayment options.
- You will lose all eligibility for additional federal student loans and grants.
- Your federal and state tax refunds can be seized.
- A portion of your Social Security disability or retirement benefits can be seized.
- If the federal government requests it, your employer can garnish your wages -- that is, send a portion of your pay to the government to cover your debt. (To learn about wage garnishment laws and limits in New York, see the Wage Garnishment page at Nolo.com)
- The government or private loan holders may sue you.
- If your loan is cosigned, your cosigner will be on the hook for the debt.
- You may find yourself caught in a situation where you have astronomical debt and no exit, because there's no statute of limitations on student loans and they cannot usually be discharged in bankruptcy.
In addition, New York may impose penalties for borrowers in default, such as refusing to renew a professional license or denying access to school records. For more information, see "New York Penalties for Defaulting on Your Student Loans."
Finally, members of certain professions may face unique and sometimes harsh penalties. For example, the names of medical professionals who have defaulted on HEAL Loans are regularly published on the Internet. Health professionals in default are also excluded from participating in the Medicare and Medicaid programs, meaning they can't accept payments from those programs or work for any organization that has a contract with either program.
Student Loan Default Can Seriously Damage Your Credit
One of the worst and most tenacious consequences of defaulting on student loans is the damage it can do to your credit rating. If you let your loans go into default, it will take years to mend your credit report. In the meantime:
- You may not be able to get a mortgage, car loan, or credit cards.
- You may have trouble renting an apartment.
- Lenders may increase interest rates on your existing loans or credit cards.
- You may have trouble opening bank accounts or obtaining insurance policies.
- Potential employers may check your credit report and turn you down for jobs.
To explore strategies for avoiding default, see "What If I Can't Pay My Student Loans?"
If your loans are already in default, see "How to Get Out of Student Loan Default."
If your student loans have been sent to a collection agency, see "How to Deal With Student Loan Collection Actions."