Consumer Comeback Blog

Nasty Student Loan Collection Actions That Can Happen If You Default

Many students and their parents do not realize the incredible reach the government and student loan lenders can have if they do not repay their loans. If you skip student loan payments or default, you can find yourself in serious financial trouble. Many people do not realize that you cannot wipe away student loan debt with a bankruptcy. These types of loans are exempt from bankruptcy court and still must be repaid. There are a few nasty repercussions when students do not repay their student loan debt.

Federal Government Can Seize Your Funds

The federal government or any collection agencies that students are turned over to have incredible power in collecting funds that are due to them from student loans that have gone unpaid. The government can seize tax refunds that would normally go it the tax payer and can even garnish a portion of someone’s Social Security retirement income. That last fact might not seem important to students who may be decades from retirement, but it could possibly have huge implications to parents who co-sign for student loans.

Lenders Can Garnish Your Wages For Student Loan Repayment

Lenders can also garnish a student’s future income. They can seize up to 15% of disposable income without even having to get a court order. Your lenders may be able to seize even more with a court order giving them permission to go after income and assets. A person’s ability to earn an income is often the biggest asset that they have, and being saddled with owing a good portion of your disposable income after taxes to the government or other lenders could really hamper students early in their careers when they need to be building up their retirement nest egg.

Parents May Be On The Hook For Student Loans

Like all loans that are co-signed by another person, parents can be held responsible for loans that are not paid by their children if they co-sign for them. Parents, in these cases, can be sued just like their children and could wind up finding their wages, Social Security, income tax refunds, and other assets garnished by the government until the loan is recouped. This is one of the biggest dangers for parents who co-sign student loans with their children. If the loan is not repaid by the children, there can be bitter feelings in the family as the parents are weighed down by the debt most likely at the time when they were most likely considering retirement.

If your student loan goes into default and is sent to a collection agency, students and their parents could be facing huge interest increases and penalties. Even if you use student loan programs such as deferrals or forbearance where you are allowed to temporarily stop making payments due to a financial hardship, you will be facing loans that will increase in size dramatically while interest and other fees continue to be added to the original amount of your loan.

Photo Credit: euthman