What Happens if My Student Loan Is Charged Off?

College students protesting over tuition hikes and student loans.
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Students who borrow money to pay for their education often leave school with thousands of dollars of student loan debt. Payments on the debt can be burdensome, especially for students who are still looking for work or who have low-paying jobs. If a student stops making payments on his loan, it goes into default and the lender can charge it off and sell it to a collection agency, which has serious consequences.


Federal Student Loans

Loans issued by the federal government generally have different policies from those issued by private lenders. This is because the government regulates the loans, while private lenders have the freedom to use their own procedures. The Department of Education does not sell student loans to other agencies, but it uses a collection department to collect payment on charged-off loans. Therefore, you will always be dealing with the Department of Education when you are trying to repay that student loan.


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Private Student Loans

Private lenders often sell their loans to other lenders when they are not profitable. In many cases, they will sell them to a collection agency as soon as your loan enters default, which is when you have not paid for 180 to 270 days, depending on the lender. The loan will be charged off on the original lender's books, meaning that the lender has taken the financial loss. However, the debt is still payable to the new lender or collection agency, who will contact you to get payment.


Collection Efforts

Student loans generally cannot be discharged in bankruptcy, so lenders and collection agencies rarely give up on collecting payments. You will probably get frequent calls from the lender trying to arrange a payment schedule. The lender might start garnishing your wages, which means that your employer sends part of each of your paychecks to the lender to repay your loan. The lender can also intercept your tax refunds and garnish part of your Social Security income. You could be sued for the entire amount you owe. If you want to go back to school, you will not be able to borrow additional student loans while you are in default.


Credit Score Effects

Your student loans appear on your credit report, so each missed payment is reported to all of the credit bureaus and lowers your credit score. When the loan is charged off, its status will change on your credit report and will significantly lower your score. If it is sold to a collection agency, the account will appear in the collections section of your credit report. Regardless of whether or not you pay it, the collections account will damage your credit score for up to seven years.