Consenquences of Defaulting on a Student Loan

It is no secret that our economy has slowed down. Every time you turn on the television you see more stories of families in crisis, the mortgage meltdown, and increasing debt. What you don’t see is how many people fall into economic downfall.

After four years in college students are ready to face the world. However, many students begin this journey with an amazing amount of student loan debt. With starter wages and gaps in employment it is easy for a student to default on their student loan. Are you safe from default? It can happen a lot quicker than you think.

There are many consequences from defaulting on a student loan. It can heavily damage your credit score, keep you from your tax refund, and most importantly add thousands of dollars in penalties for being late.

Credit Score

If you default on a student loan you will be turned in to the 3 major credit bureaus. Many things will happen after you are labeled as being in default. Your credit score will drastically decline, making it very hard for you to buy a car, home or rent anything. Lenders will see you as high risk, and turn you down, or offer you loans at a much higher interest rate.

Federal Tax Refund

When you are put into default the government will file for an offset of your federal taxes, and this year your economic stimulus check. They will continue to offset your taxes until the debt is paid off. This is not a good way to pay off your loan because the majority of your tax return will simply pay off interest on your loan, not even touching your principal balance.


You will begin to accrue interest on your loan. If you ignore it for a few years, this interest can grow very fast, racking up thousands of dollars a year. Pretty soon your small $10,000 loan can become 12, 15, even 20,000 depending on the interest rate. You will also receive charges from any credit collection companies that work on the government’s behalf.

Inability to Obtain More Loans

Once you are in default you will no longer be able to use student loans to pay for college. You will stay in this status until the loan becomes in good standing.

As you can see there are a lot of consequences from defaulting on your student loan. There is a loan rehab program that can help get you back on track. You must pay a set amount on your loan for nine months to become in good standing again. This amount is typically around 1% of your loan amount.

You can avoid default altogether by working with your loan provider. The government does allow qualified candidates to defer the loan due to financial hardship. As soon as you have a problem paying your loan you should call the loan provider and see what options you have.