The Consequences of Not Repaying Federal Student Loans
Today’s typical college graduate will have close to $24,000 in federal student loans. Student loans can be a great way for a student who would not otherwise be able to attend college to finance his or her education. However, the consequences of falling behind on federal student loans can be catastrophic to a young person’s credit.
Since payments start within six months of graduation, a student only has six months to find a job that will allow him or her to start making payments on the loans.
The consequences of ignoring those payments can be disastrous. Student loans cannot be discharged in bankruptcy. Even extenuating circumstances such as long-term disability cannot be used to get rid of student loan obligations. Additionally, there are no limits on what constitutes “reasonable” fees that can be charged by collection agencies once the loans go into arrears. This means that banks are free to add however much they want to the original loan amount if a graduate falls behind on his or her student loan payments.
Just missing one payment by more than 30 days in many cases will trigger an automatic notation on your credit report. Depending on your score before you made this mistake, missing a payment can reduce your credit score by up to fifty points. After you miss several student loan payments in a row, the federal government will turn the account over to a private collection agency.
By law, a bank can sue someone who is behind on his or her student loan payments and be issued a judgment for the remaining balance. In addition to this ruining the credit score and report of the person who is behind on his or her payments, this judgment can be used to garnish wages and earnings. Up to 25% of net pay, as well as the total amount of any tax refunds, and any Social Security income can be taken by a bank and applied to the balance of a student loan. Since there are no limits on fees, many people who find themselves in this situation discover that these mandatory payments do very little to actually reduce their loan balance, leaving them little hope of ever getting out of debt.
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