What Happens When You Default on Your Student Loan?


Quick Answer

When a student defaults on a student loan, the school or loan guarantor may intervene to recover the unpaid balance, reports Federal Student Aid. The loan account may be assigned to a collection agency, and the student may lose eligibility for other repayment options and future financial aid.

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Full Answer

Default results in the entire unpaid balance and interest on the loan being due and payable immediately, states Federal Student Aid. The loan debt typically increases due to late fees, attorney's fees and other costs associated with the collection process. A student in default may lose the ability to defer or forbear the loan or to enter into other repayment plans. Because the loan will likely be assigned to a collection agency, the student's credit rating will be damaged and the student will have more difficulty acquiring a credit card or buying a house or vehicle.

Additionally, default could result in the student's federal or state tax refunds being withheld for the purpose of paying off the loan balance, according to Federal Student Aid. Similarly, the government may garnish the student's wages by requiring the student's employer withhold and send a portion of every paycheck to the government. The loan holder may also take legal action against an individual, and the student may then be unable to purchase or sell any assets.

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