QandAs: Loans

What happens if I default on my student loans?

Answer:
Defaulting on your student loans occurs if you fall

behind on your loan payments, without deferment or forbearance. A loan deferment enables you to temporarily stop making payments on your student loans, for reasons including re-enrollment in school, military service, and unemployment. A forbearance may be in option when you are not able to make payments, but are not eligible for a deferment, such as if you return to school as less than a half-time student. Generally, once the situation is resolved or ends, you must start making payments again.

When someone defaults on a student loan, the options are extremely limited. In default mode, forbearance and deferment are no longer valid options. In addition, the entire balance of the student loan is now due, all at once. This makes recovery from defaulting on your student loans extremely difficult. Most people cannot pay off the entire amount of the loan in one single payment, and must look for other options.

Many financial companies specialize in defaulted student loans, and can help you should you find yourself in that predicament. They help you get from defaulting on a loan to a “current loan” status, and their services may even be free, depending upon the company. In addition, the US Department of Education has an Ombudsman who can help after you have demonstrated that you have taken the action required on your part.

If you do not pay your defaulted loan in full, the IRS has the right to apply any income tax refunds owed to you to your loan balance, until it is paid in full. This is called a tax refund offset, and can be challenged, although this is not generally successful. Another method of collecting on a loan is for the IRS to garnish your wages, or withhold money from your paycheck. Other forms of collecting include withholding federal benefits such as Social Security money, and lawsuits to collect on defaulted loans.