If you default on your student loan, it can have serious consequences. For example, the federal government and your lender may take action against you to collect what you owe. If you have trouble making payments on time, consider applying for a deferment or forbearance. This is what happens when you stop paying student loans:
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Wage Garnishment
If you default on your student loans, the government can take your income tax refund and even garnish your wages to ensure that you pay back what you owe. As SoFi professionals say, “If you default on your federal student loans, the government might take your tax refund or cut up to 15% of your wages.”
This is a process known as wage garnishment. The government will deduct money from your paycheck before you receive it and send it straight to the government to pay off your student loans. If this happens, any money left over after paying off your loan balance will be sent directly to you via direct deposit.
Tax Refund Set-Off
The IRS can take money from your tax refund to pay off your defaulted student loans. The IRS’ll notify you if this happens and you need to provide proof that you’re making payments on your loan. If you don’t know what happened with your tax refund or why it never showed up in the first place, call the company that handles your student loans immediately.
The government doesn’t have many options for collecting debt from people who have defaulted on their loans—they can’t hire a private collection agency nor sue them for repayment—but they do have access to every American’s tax information through the IRS.
Default Notation In Credit Report
If your student loan is in default and you haven’t made payments for more than 9 months, the consequences will be significant. A default notation will appear on your credit report, which may negatively affect your ability to get a car loan, home mortgage or other types of credit.
Difficulty Opening Lines Of Credit
As a result of your student loan default, you will have difficulty opening lines of credit. This includes loans, mortgages and credit card offers. If you are looking to buy a car or home, it will be harder for you to do so because lenders can see that you’ve defaulted on your student loans in the past.
It’s important to note that this is different from simply having bad credit—it’s much more complicated than that. Once you have defaulted on your loans, there are no federal laws protecting borrowers from being denied access to capital markets due to their past delinquencies or defaults (although some states have laws).
Higher Interest Rates On Other Loans
If you default on your student loans, it could affect your ability to get other loans. You’ll have to pay off the debt before borrowing money again.
You might also have a harder time getting a mortgage or car loan if lenders see that student loan payments need to catch up. This is because many of them use credit reports as part of their evaluation process for approving loans, and defaults are considered a sign of financial irresponsibility.
The same goes for credit cards, which may offer more favorable rates and terms to those who demonstrate good credit history by paying bills on time and keeping low balances compared to their total available credit limits.