Each year, millions of college students take out student loans to pay for their education. Although there are multiple private institutions that offer student loans, many students choose federal student loans. Whether the loan is private or federal, eventually the lender expects the student to pay the money back. When a student fails to pay it back, the loan could fall into default. There are consequences to defaulting on a student loan.
If you default on a student loan, the IRS can confiscate income until the student loan is paid in full. An interception of tax refunds is a popular method of collection, and the Department of Education collects millions using this method. Federal benefits can also be confiscated. The government can take income such as Social Security or disability benefits. However, there are caps on the amount of benefits that can be collected. The government cannot take more than 15 percent of your total benefits.
Challenging the IRS
If your tax refund is confiscated because of student loans, you can appeal the tax refund offset to the Department of Education. You must have a legitimate defense as to why you should be awarded a refund. People often challenge a tax offset when they have already repaid the loan, filed for bankruptcy or the loan is not enforceable because of forgery.
It isn't uncommon for a private or government lender to sue an individual because he has defaulted on his student loans. According to Nolo, there is no statue of limitations for student loan lawsuits. Private and government institutions can sue a person at any time. If the lender wins the suit, the defendant's wages can be garnished, liens can be attached to the defendant's property and levies placed on any financial accounts the defendant possesses. Private lenders usually send a case into collections once the default has occurred. Once in collections, the student's credit suffers. A lower credit score can affect other aspects of financial life, including the ability to obtain loans and other credit.
Tips For Avoiding Defaults
There are certain actions you can take to keep from defaulting on your student loans. First, understand your responsibilities regarding repayment obligations and read any fine print carefully. Second, notify your lender if you are having problems with repayment, seeking help as early as possible. Finally, work to create and maintain a monthly budget to make as many payments as you can.