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What are the Consequences of a Defaulted Student Loan?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 20 March 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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The consequences of a defaulted student loan can be severe. Defaulting on a student loan is not like defaulting on any other type of debt. When an individual has to deal with a defaulted student loan, he or she will potentially have to deal with collection agencies, wage garnishment, loss of tax refunds, and credit damage.

When an individual has a defaulted student loan, he or she is going to have to deal with collection agencies. Collection agencies are going to call and write frequently to try to collect the debt. Collection agencies are not going to give up easily, and they will continually try to contact the individual who owes the money. If the collection agency incurs any expenses trying to collect the debt, the borrower may be responsible for repaying those expenses.

An individual with a defaulted student loan is also going to have to potentially deal with wage garnishment. If a lawsuit is filed, a judge could decide to garnish the wages of the individual to repay the debt. This means that a portion of the individual's paycheck is going to be taken out to repay student loans before he or she receives any money. This can make it difficult to have enough money to live on.

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Another potential consequence of a defaulted student loan is a loss of tax refunds. If an individual is due a tax refund, the federal government can intercept it before it is distributed. Tax refunds can be taken several years in a row to pay back the debt.

Dealing with a defaulted student loan can also cause long-term credit damage. If an individual does not pay back his or her student loans, information about the loans will go on his or her credit report. This information can stay on a credit report for as long as seven years. This means it will be very difficult for that individual to obtain any type of credit in the future.

If the individual can secure credit, he or she will have to settle for paying a higher interest rate on the loan. Lenders are not going to want to extend financing unless they can charge a much higher interest rate to make up for the additional risk they are taking on. This will make it more expensive for the individual to borrow money in the future.

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