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Federal student loans are, to put it bluntly, a very different kind of debt. As young, idealistic high schoolers and college freshmen, we’re taught that college is necessary to get ahead in life, and (unless you come from serious wealth), the ticket to that ride is paid for with student loans. Moreover, nearly all financial aid award packages from schools include at least some federal student loans (unless you get a full scholarship). All you have to do is sign!
No one tells you the ugly side of federal student loans, however, and many people do not realize the very serious consequences that can result from defaulting on your federal student loan obligations. No other type of consumer debt is like this. It’s pretty remarkable.
- Without a court order, the federal government or federal loan guarantor can garnish your wages. They can seize a sizable portion of your paycheck (up to 25% in some cases), every single pay period.
- Without a court order, the federal government or federal loan guarantor can seize your tax refund. Makes the IRS look tame.
- Without a court order, the federal government can offset federal benefits, such as Social Security or disability payments. In poverty? Too bad.
- Collections agencies will report defaults to all three credit bureaus, which will lower your credit score significantly.
- Federal law authorizes private collections agencies to tack on “collections costs” of anywhere from 18.5% to 25% of the defaulted loan balance. This is how collections agencies profit off of defaulted borrowers– and it’s the taxpayers who often foot the bill. Federal student loan debt collection is a multimillion business that involves dozens of private contracted third-party debt collection agencies.
- You are prohibited from obtaining new federal financial aid while you are in default. So if you defaulted before you finished your degree, you’re stuck.
- There’s no statute of limitations, which means the government can collect on your federal student loans for the rest of your life. That means that if, for instance, your wages are being garnished, they will continue to be garnished until the loan is completely paid off.
- The federal government or loan guarantor can sue you in court.
Luckily, there are lots of programs to help keep people from defaulting. There’s Income-Based Repayment to keep monthly payments relatively affordable, consolidation to help with repayment management, and loan forgivenessoptions as well. Deferment and forbearance are also available if you find yourself unable to make your minimum payments.