The Consequences of Unpaid Student Loans

Student Loan Debt May Result in Lawsuits and Wage Garnishment

Oct 23, 2009

Unpaid student loans have painful legal consequences. A student loan lender may engage in collection efforts that include lawsuits and wage garnishment.

When an individual stops making payments on his or her student loan, the student loan falls into default. Defaulted loans have extreme consequences including credit report damage, wage garnishment, and the inability to apply for new student loans until the defaulted loan is rehabilitated.

Student Loan Repayment Problems

Student loans benefit students by allowing them to pay for college more easily, but few students stop to consider that not only must student loans be repaid upon graduation, but they must be repaid with interest. Repayment grace periods are also typically very short. Students can expect to be given only six months or so after graduation before they must begin making payments.

In addition, many degree programs do not easily allow students to get entry level jobs with their degrees that provide a high enough income to comfortably allow for repayment of student loans- especially if the student paid for college solely with loans. The more money an individual borrows, the more he or she will have to pay back later.

Credit Consequences of Unpaid College Loans

Almost any loan an individual takes out appears on his or her credit report. Payment history on debt accounts for 35% of an individual’s overall credit score. If a student ceases to make payments on his or her college loans for any reason, the missed payments will cause a significant drop in credit score.

As if a low credit score weren’t enough, there is no statute of limitations on the repayment of student loans. Thus college debt due to loans will never disappear from a credit history until the loans are paid in full and the reporting period expires.

Collection Efforts and Lawsuits Over Unpaid Student Loans

When an unsecured debt goes unpaid, the creditor has several options available to attempt to collect the debt. These options include:

Although many unsecured debts stop at filing a lawsuit against the consumer, individuals with student loan debt often have a debt that is much higher than that of a defaulted credit card. The higher a debt is, the greater the risk of being sued. Due to the fact that student loan debt has no statute of limitations, a creditor may opt to sue a consumer for his or her unpaid college loan years after communication with the consumer has ceased. Interest and fees will continue to accrue on any debt the longer it goes unpaid.

Student Loan Lawsuits May Result In Wage Garnishment

Wage garnishment for student loans is not only common, its standard. If a student loan is private, the creditor must first file a lawsuit with the court and receive a judgment against the consumer. Once the creditor is granted a judgment, it may apply with the court for a Writ of Garnishment. The Writ of Garnishment allows the creditor to legally withhold wages from a consumer’s paycheck until the debt is satisfied.

A federal student loan debt, however, operates by a slightly different set of rules. Because the student loan debt is owed to the federal government and not a private creditor, a Writ of Garnishment is not necessary to begin docking an individual’s paychecks. Federal wage garnishment can occur at any time with or without a court order.

Some states do not allow wage garnishment due to a judgment. These states, however, do allow federal wage garnishment. Anyone owing a federal student loan will be forced to pay the debt sooner or later.

Exempt Income and Federal Wage Garnishment

Certain forms of income are exempt from wage garnishment by creditors following a judgment. These forms of income are:

When the creditor is the federal government, however, government income that is traditionally exempt becomes fair game and can and will be garnished to recover the debt.

Student Loans Cannot Be Discharged Through Bankruptcy

Bankruptcy allows an individual who is overwhelmed by debt to liquidate his assets, pay as much of the debt as he can, and discharge the rest. Under section 220 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, however, a consumer’s ability to discharge student loans in bankruptcy was severely limited.

Very few individuals will fit the strict requirements for discharging their college debts in a bankruptcy. Those that feel that they do meet the requirements must have their request approved by the judge. Approvals vary and are not dictated by prior case law.

Mortgage Loans and Unpaid Student Loan Debt

Individuals with unpaid student loan debt will have an injured credit report- especially if the unpaid debt has resulted in a judgment. Because of this, a conventional mortgage loan may not be an option due to the strict credit score requirements. FHA loans, however, are government-backed securities. Although the credit and down payment requirements are more lenient on an FHA loan, the government will not approve anyone with a defaulted student loan- no matter how good their credit score or down payment may be.

In addition, students hoping to return to school must rehabilitate their defaulted loans before being allowed to apply for new ones.

The copyright of the article The Consequences of Unpaid Student Loans in Student Loans is owned by Candice Gillingwater. Permission to republish The Consequences of Unpaid Student Loans in print or online must be granted by the author in writing.