No one plans to default on a student loan but it does sometimes happen due to an unforeseen negative event in your life – a personal tragedy, a severe illness, etc. Having a defaulted loan to contend with in addition to whatever event happened to you is another severe blow. However, don’t neglect dealing with it. You must become proactive in resolving your finances.
Defaults on a student loan occurs after it has gone unpaid for two hundred and seventy days in the case of a loan repayable in monthly payments or three hundred and thirty days in the case of a loan repayable in less recurrent payments. When a student loan meets the criteria for default, the lender will exercise “due diligence” meaning that they must make a serious effort to find you and negotiate how you will repay the debt. If those efforts are unsuccessful, the next probable step for the lender is to place your student loan in default with your state’s guaranty agency.
At the time a student loan is judged to be in default, the terms of the loan may be accelerated and the entire balance becomes due and payable, with principal and interest, at that point. After such time as your defaulted student loan is sent to your state’s guaranty agency or The Dept. of Education to be collected, one of several things can happen. Defaulted student loans carry the possibility of being added to your Federal Income Tax.
While you have the right to contest the ruling, you cannot stop the resulting withholding of funds while you seek resolution. Refunds that are due to jointly filing couples can be subjected to withholding for repayment of the defaulted loan, The spouse who is not involved in the default can recover their portion by filing an “injured spouse” claim with the Internal Revenue Service. Social Security benefits, if any, may also be liable for withholding up to fifteen percent of the gross amount payable. If the defaulted student loan is held by a private lender, the amount of the default may be increased by collection fees. There is nothing in the law that prevents the government agencies using private collection agencies but normally they do not follow this avenue of collection. In addition to these steps, your wages may be garnished. This will reduce your gross receipts from your employer by 10-15%. Your employer then remits the proceeds of garnishment to the lender.
Before you allow your defaulted student loan to follow these normal but punishing steps towards collection by the lender, examine a Federal Loan Consolidation Program. This step would reduce your payments and possibly spread them over a significant period, even as much as thirty years. You need to recognize that your future financial well being is at stake. If you are fast approaching a default or have defaulted on a student loan, call the lending institution and arrange a meeting to discuss ways to deal with your problem Your willingness to become proactive and seek an arrangement that will work for both sides has a good chance of success. Own your future by taking control of your finances and finding a way to remove the stain from your credit history and to take care of a default or near default situation.