How Does a Defaulted Student Loan Affect Credit?
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No Default Of Your Own
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Student loans are one of the best ways to pay for college. Instead of paying a seemingly insurmountable amount of money up front to attend classes, a student loan can get you in without having to pay a lot of interest. However, should you default on a student loan, there are ramifications.
Availability of Student Loans
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Almost all student loans submitted through colleges are backed by the U.S. government. Almost all of them are approved for a certain amount, regardless of your economic status. In fact, many student loans involve receiving contributions from the school that lower the amount you would owe. The interest rates on student loans are very low compared to personal loans, making it even easier to pay back. You might even qualify for a Pell Grant, which is school money that you don't have to repay.
According to the government's loan website (see additional sources below) there are also several options to pay back loans; some involve total deferment while you participate in government programs like AmeriCorps or serving in the United States military. You can even consolidate student loans if you have more than one.
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Defaulted Loan Collection and Help
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But it is this ease of getting and repaying a student loan that makes defaulting on one pretty detrimental to your credit report and financial status. The Department of Treasury can step in and garnish your tax returns until your loan is paid off. If that isn't enough, they can apply for administrative wage garnishment, which mandates your employers to send up to 15 percent of your income back to the Department of Treasury. If these actions don't get the government back their money, they may report your loans to credit bureaus and ask for help from collection agencies. Collection costs and processing fees may also apply. There is also no statute of limitations that applies to the government's attempts to collect defaulted student loan money.
To avoid these situations, be realistic about your financial status and ask for help. The government is willing to work with you on helping you avoid default. By responding to default inquiries or even asking for help before it gets bad, you may see yourself out of a sticky situation faster than expected.
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