Help With Defaulted Student Loans

For those on the edge of student loan default, it is crucial to avoid default if at all possible. Defaulted student loans can severely affect all aspects of your financial life, and once you fall into default, the help available to you may be limited. Defaulting on student loans can trigger serious legal and financial consequences, including wage garnishments, tax refund offsets, and even damage to your credit. Below is an overview of the steps that may be taken to recover the outstanding balance on defaulted student loans, and why it’s so important to act early to prevent this outcome. To recover the outstanding balance due on defaulted student loans, any of the following steps may be taken:

1. Wage Garnishments

If your student loans go into default, one of the first and most aggressive actions that can be taken to recover the debt is wage garnishment. This means that your employer could be required to withhold a portion of your paycheck, often up to 15% of your disposable income, to pay off the loan. Unlike regular debt collection, wage garnishment for student loans doesn’t require a court order, and it can continue until the loan is fully paid off. This can put a serious strain on your finances, affecting your ability to meet other financial obligations.

Pro Tip: If you’re already in default and facing wage garnishment, contact your loan servicer immediately to discuss any possible options for stopping or reducing the garnishment. There may be repayment plans or other avenues available to you.

2. Tax Refund Offsets

If you owe on defaulted student loans, the government may seize your tax refund to pay off part of your debt. This process is known as a tax refund offset. The Department of Education can collect the outstanding balance by intercepting your federal tax refund. This is automatic, and there is little you can do once it happens, which can be a huge financial setback if you were relying on that refund to cover living expenses or other financial obligations.

3. Federal Benefits Offsets

In addition to tax refunds, the government can also seize other federal benefits to recover defaulted student loans. This includes Social Security payments and disability benefits. While this might not affect everyone, it’s particularly troubling for retirees or those on a fixed income, as it could leave them struggling to meet basic needs.

4. License Revocations

In certain cases, if your federal student loans are in default, your professional or occupational licenses could be revoked. This is particularly true for professions that require state or federal licensure, such as healthcare, law, or education. Losing your license due to unpaid student loans could significantly impact your career and income, making it even harder to repay the debt in the future.

5. Fees and Fines

When your student loan is in default, it’s not just the balance that increases—it’s the fees and penalties. These fees are designed to help compensate the loan servicer for the costs of trying to collect the debt. However, these fees can quickly snowball and add thousands of dollars to the amount you owe. Defaulted loans also accumulate interest at a faster rate, further increasing your overall debt.

6. Legal Action

In some cases, the federal government or the loan servicer may take legal action to recover the debt. This could include filing a lawsuit against you or placing a lien on your property. Legal action often leads to garnishment of your wages, tax refunds, and bank accounts, as well as the possibility of further financial penalties. The expense and stress of a lawsuit can make it more difficult to recover financially.

7. Notification of Credit Bureaus

Once your loans go into default, the loan servicer will typically report your default to the credit bureaus. This can cause significant damage to your credit score, making it harder to qualify for loans, credit cards, or even housing in the future. The impact on your credit can last for years, and it can be extremely challenging to rebuild your credit history after a default.

Once in student loan default the borrower is no longer eligible for forbearances or deferments, and is unable to receive any additional Title IV federal student aid (if in default on any Title IV student loans) until approved payments have been made consecutively for a minimum of six months.

For help with defaulted student loans, the Higher Education Act states that borrowers in default have the right to amend their defaulted student loans by setting up a reasonable and affordable payment plan with the loan holders. To get help with defaulted student loans, the borrower needs to contact the collection agency and arrange to rehabilitate the defaulted student loans. The borrower may need to detail their reasonable and affordable payment plan offer in writing, and may be required to supply additional supporting documentation if needed. Once a payment plan is agreed upon, the borrower needs to make 9 of 10 consecutive payments within 20 days of the due date. Once the payment requirements have been satisfied, the borrower will no longer be considered in default, and the record of the default will be removed from credit reports (however, as a result of the delinquencies which lead to default, your credit may be adversely effected for up to 7 years).

To get additional help with defaulted student loans, borrowers of private student loans can contact the servicer of the loans or the original lender to discuss their options. To get additional help with defaulted student loans, borrowers of federal student loans can contact Default Resolution Group at the US Department of Education.

The consequences of student loan default are severe and far-reaching. The impact on your finances, career, and credit history can be devastating, and it’s crucial to avoid default at all costs. If you’re struggling with your student loan payments, it’s important to reach out to your loan servicer to discuss options like deferment, forbearance, or income-driven repayment plans before things escalate. The earlier you take action, the better your chances of keeping your loan in good standing and avoiding the consequences of default.