Defaulting on a loan can have severe and long-lasting financial consequences. When you default on a loan, you fail to make payments as agreed in the loan contract. Defaulting is not something to take lightly, as it can ruin your credit, lead to legal action, and make it very difficult to obtain loans and credit in the future. In this article, we will explore the major consequences of loan default so you can understand exactly what could happen if you fail to repay your loans.
Damaged Credit and Credit Denials
One of the most damaging results of defaulting on a loan is harm to your credit score and report. When you default, the lender will report this to the major credit bureaus. A default can slash 100 points or more off your credit score. The default will stay on your credit report for up to 7 years after the date you first failed to make a payment.
With a default on your record, you will have a very difficult time getting approved for new credit Lenders will see you as a high-risk borrower so you will likely face credit denials for credit cards, mortgages, auto loans, and other credit products Even if you are approved, expect to pay sky-high interest rates. A poor credit score could even lead to trouble getting utilities, insurance, or a cell phone plan.
Wage Garnishment
When you default on federal student loans or other types of loans, the government can garnish your wages without needing a court order This means they can force your employer to withhold a portion of your paycheck to put towards the past-due debt Federal student loans allow wage garnishment of up to 15% of your disposable pay. Other types of lenders must go to court to pursue wage garnishment. With a court judgment, they can also potentially garnish up to 25% of your disposable pay.
Having a portion of your wages garnished will make it difficult to afford your regular living expenses. You may struggle to pay your rent, utilities, and other bills if too much money is being taken out of each paycheck. It’s important to take action to avoid default rather than face losing part of your pay.
Tax Refunds and Government Payment Seizure
In addition to wage garnishment, the government can also seize your tax refunds and government benefit payments to repay a defaulted federal student loan. So if you are relying on getting a $2000 tax refund, you may either get a much smaller refund or no refund at all if the government claims that money.
The government can also seize a portion of your Social Security payments, including SSDI payments to repay the defaulted loans. This loss of benefits can have devastating financial consequences, especially if Social Security income was helping you stay afloat on a limited income. Disability benefits from the VA can also be at risk if you default on student loans or other federal loans.
Lawsuits, Foreclosure, and Bank Account Levies
When you default, the lender can sue you to recover what you owe. If they get a court judgment against you, they may be able to foreclose on your home or put a levy on your bank account. With a bank levy, the creditor can seize money directly out of your checking or savings account.
You may also face additional penalties if you get sued, including court costs, collection fees, late fees, and attorney fees. These can greatly increase the total amount you end up owing. Defaulting ends up being much more costly than sticking to the original repayment plan.
Loan Acceleration
Some lenders can declare the full amount of the loan due immediately when you default. This is known as accelerating the loan. The lender will demand immediate repayment of the entire outstanding balance, which may amount to thousands of dollars that you do not have readily available. This makes the debt even more difficult to manage.
Federal student loans give you the right to cure the default and avoid loan acceleration by making 9 on-time payments over a 10-month period. However, private student loans and other types of loans may not offer this option.
Loss of Federal Student Aid Eligibility
Defaulting on federal student loans can make you ineligible for additional federal student aid. Even if you default on just one federal loan, you will be unable to receive further aid including Pell Grants, federal work-study, and federal student loans. This can destroy your plans to return to college or allow your children to pursue higher education if you can no longer access financial aid.
You may be able to regain eligibility by getting your loans out of default through consolidation, rehabilitation, or repayment in full. However, this is often an arduous process. It is wise to avoid default in the first place if you may need federal student aid in the future.
Private Loan Charges and Collection Harassment
Defaulting on private student loans or personal loans often comes with even higher fees and penalties than federal loans. You may face collection, late, and attorney fees that quickly snowball. The lender may even add these fees to your loan balance, leaving you with an even larger debt.
Expect constant collections calls at all hours when you default on a private loan. Lenders and third-party collectors will try to get in touch with you repeatedly to demand payment. If you cannot pay, this harassment can be stressful and frustrating to deal with on a daily basis.
Difficulty Finding Housing
Landlords and property managers will often review your credit before renting to you. If they see a default on your record, you may have trouble getting approved for an apartment. Some landlords may require you to pay several months rent in advance or have a co-signer with good credit if you have bad credit due to a default. If you ever hope to buy, mortgage lenders will be extremely reluctant to lend to you with the poor credit caused by a student loan default.
Can’t Return to School
If you default on federal student loans, you will lose eligibility for federal student aid, as mentioned. Even if you default on private student loans, you will have trouble going back to school. Private lenders will be unwilling to lend to you. Paying out-of-pocket for tuition may be impossible with your finances ruined by default. Getting an education to try to improve your career and income potential will be very difficult, if not impossible.
Harder Job Search
Some employers check credit reports as part of the job application process. If they see you have defaulted on loans, they may turn you down for employment. Even if you get hired, a bad credit history could bar you from certain types of jobs that involve handling money or sensitive customer information. Defaulting can block you from career opportunities and prevent you from earning the income you need to pay back what you owe.
Can’t Get Security Clearance
For military servicemembers and government employees, defaulting can destroy your chances of getting a security clearance. Even contractors who need security clearance to work on government projects may have their clearance application denied if they have defaults on their record. Without security clearance, your career options in these fields becomes severely limited.
Other Legal Consequences
Depending on the state you live in and the laws that apply to certain types of professional licenses, you may even face suspension of your driver’s license or loss of a professional license if you default on certain loans. This depends on state law, but it is a possibility in some situations. Losing driving or professional licensing privileges can make it very difficult to make a living and get out of debt.
Financial and Emotional Stress
Defaulting often goes hand-in-hand with serious financial hardship. Aggressive collection actions, loss of wages, benefits, and tax refunds, and mounting fees are devastating. All this can take a major toll on mental health as well. You may struggle with stress, anxiety, depression, insomnia, and other health effects if you default. Financial problems are frequently cited as a major source of mental and emotional stress. Default can ruin family relationships and your overall wellbeing too.
Long-Term Damage
Clearly, the consequences of defaulting on a loan can snowball and have long-lasting impact. After 7 years, the default will finally drop off your credit reports if you have taken action to resolve the debt. Still, the damage to your finances can linger far longer. It can take many years of careful money management to recover. Some borrowers never financially recover or rebuild credit after a student loan default. Think carefully before walking away from loan obligations. The consequences are too steep.
Avoid Default and Seek Help
If you are struggling to pay your loans, it is absolutely critical to seek help before you go into default. Call your lender explain your situation right away. They should be able to offer deferment, forbearance, or alternate repayment plans to help you avoid default. You may qualify for repayment programs like income-based repayment that will make your payments more affordable.
Your loan servicer can advise you of all options available to keep your loan in good standing. This will help you avert the serious consequences of default. Financial experts also recommend trying to make at least some token payment each month, even $5 or $20, rather than paying nothing at all. This demonstrates good faith.
Reaching out for help quickly is always the wisest choice when facing financial hardship. Default should not be an option you consider lightly because the repercussions can follow you for many years. Be proactive and explore every
Student Loan Service Center
Missing payments or making recurring late payments can have serious consequences.
- Late payments will result in a late charge. The amount of the charge is determined by the type of loan and the payment amount.
- Additional collection fees may be assessed by the Student Loan Service Center for activities such as specialized letters, phone calls or credit reporting.
- The school that issued the loan will place a hold stopping the release of any official academic transcripts or records.
- Borrowers in default will not be eligible for additional federal financial aid.
- Loss of deferment and cancellation rights.
- Late payments of 30 days or more are reported to the National Credit Report Agencies resulting in poor credit history and lower credit scores.
- A hold may be filed with the North Dakota Tax Commission Office allowing a borrowers ND State Tax Refund to be claimed.
- After seven months of delinquency the loan may be accelerated resulting in the entire loan balance becoming due in full immediately.
- The SLSC refers loans to third party collection agencies after seven months of delinquency. This results in additional contacts from the agencies to request payment, as well as additional collection costs, up to 28% of the total balance.
- Once an account is referred to an agency the SLSC cannot work with you to establish a repayment arrangement.
- A legal suit may be filed for the acquisition of an judgement.
Student loans are not dischargeable through bankruptcy and there is no statute of limitations on legal action or collections. As a result, unresolved student loan debt can always have negative implications for the borrower.
Consequences of Defaulting on Your Student Loans
FAQ
What is a consequence of loan default?
What is a potential consequence of defaulting on a loan?
Which of the following is a potential consequence of defaulting on a loan brainly?
What is the negative impact of default?
What happens if I default on my federal student loans?
Defaulting on your federal student loans comes with some serious consequences. Here are just a few examples highlighted on the federal student aid website: Tracking your credit score can help you see how choosing to pay (or not pay) your student loans has an impact on your financial well-being.
How long does a student loan take to default?
Default timelines vary for different types of student loans. Federal student loans. Most federal student loans enter default when payments are roughly nine months, or 270 days, past due. Federal Perkins loans can default immediately if you don’t make any scheduled payment by its due date. Private student loans.
What does it mean if a loan is in default?
Loan default means you’ve failed to make the required payment by the due date you agreed to. 4 A lender usually considers your loan in default if you’re more than 30 days late. At this point, the lenders may report the late payment to the credit bureaus. This will instantly affect your credit score.
What is a student loan default?
Student loan default means you have failed to make payments on your student loans for a specified period of time, which is outlined in the terms of your loan. The exact timeline may vary depending on your lender. According to Matt Newlin, a higher education consultant, the typical period is 270 days.