Defaulting on student loans is a serious financial mistake. Default occurs when borrowers become 270 days past due on their scheduled student loan payment. The consequences of default are severe, but there are ways borrowers can reduce their risk of defaulting on a federal student loan.
Consequences of Default
Like any other debt, student loans are important financial and legal obligations and the consequences for defaulting on these loans can be frightening.
- Defaulting on student loans can result in one or more of the following:
- A report to all national credit bureaus that a borrower has defaulted, which is damaging to their credit rating. Student loan default is extremely detrimental to a credit rating and ranks right up there with foreclosure, repossession, and charge-off.
- Loss of eligibility for further state and federal student aid.
- Loss of eligibility for deferments, forbearances, and repayment plan options.
- A demand for immediate payment of the entire balance of the loan, plus any unpaid interest.
- The defaulted loan account being turned over to a collection agency.
- Assessment of collection costs of up to 25% of the defaulted loan's outstanding balance.
- The possibility of being sued by your guarantor or the U.S. Department of Education.
- Federal and state income tax refunds, as well as federal Treasury payments such as Social Security payments, being withheld.
- Garnishment of up to 15% of a borrower's wages.
- Civil litigation to force repayment.
- Loss of professional, occupational, business, industry, recreational, and motor vehicle licenses.
- Academic transcripts being placed on hold.
Borrowers who are experiencing difficulty while repaying their student loans should not wait until they have missed a payment to seek assistance. There are many solutions to help borrowers keep their accounts current.
Factors that Reduce the Likelihood of Default
Borrowers who default risk long-term damage to their credit rating and financial futures. While many factors influence the likelihood of default, below are a few things that borrowers can do to reduce their risk.
Graduating - Borrowers who withdraw from college before completing a degree are more likely to default.
Achieving Academic Success - As grade point average (GPA) rises, the probability of default falls.
Being Continuously Enrolled - Borrowers who are continuously enrolled are less likely to default than borrowers with interrupted enrollment periods.
Changing Majors No More Than Twice - Borrowers who change majors more than twice are more likely to default.
Declaring a Second Major - Borrowers who declare second majors are less likely to default.
Attending Graduate School - Borrowers who attend graduate or professional school are less likely to default than those who have not.
Being Employed Upon Graduation - Borrowers who are unemployed or have low wages are more likely to default.
Earning Adequate Income - Borrowers with high earnings after college are less likely to default than those with low earnings.
Preventing Loans from Going Past Due - Borrowers who become delinquent on their loans more than once are more likely to default.
Using Deferment & Forbearance as Needed - Borrowers who have been in a deferment or forbearance are less likely to default.
Tip: Even if a borrower never defaults on a student loan, late payments and delinquency can affect their ability to borrow money to buy a car or house in the future.
Dynarski, M. (1994). Who defaults on student loans? Findings from the national Postsecondary Student Aid Study. Economics of Education Review. 13(1), 55.
Kantrowitz, M. (2010). Calculating the Contribution of Demographic Differences to Default Rates. Retrieved from http://finaid.org/educators/20100405demographicdifferences.pdf
McMillion, R. (2004). Student Loan Default Literature Review. Texas Guaranteed Student Loan Corporation. Retrieved from http://www.tgslc.org/pdf/default_lit_review.pdf
Price, D.V. (2001). Student Loan Forbearance and Its Relationship to Default. Indianapolis, IN: Lumina Foundation for Education.
Steiner, Matt, and Natali Teszler. 2003. The Characteristics Associated with Student Loan Default at Texas A&M University. Produced by Texas Guaranteed in Association with Texas A&M University.