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Student Loan Law Series: Consequences of Default

Students become at risk of default of FFELS or Direct Loans if they fail to make a payment for 270 days for loans repayable in monthly installments or 330 days for loans repayable less frequently than monthly. Consequences of defaulting on student loans include collections, administrative wage garnishment, tax refund intercept, social security offset, lawsuit, and others.

Collection fees must be reasonable. Collection charges on default are f 25% of the outstanding principal and interest, which was determined as a result in a settlement of a case, Gibbons v Riley (E.DN.Y. Nov 9 1994). Student loans such as Perkins loans charge collection fees and accrued interest of 30% on the principle amount.

The consequence of administrative wage garnishment can be up to 15% of disposable pay, the amount seen after health insurance, social security taxes, and all other required deductions. However, the person must be left with 30 X federal minimum wage, $217.5 per week. With an administrative wage garnishment a notice must be sent out 30 days prior to garnishment starting, and if hearing is requested within the 30 days, the garnishment will cease until the hearing. This can be avoided by making repayment before garnishment begins.

Default can mean that your tax refund is at risk of being taken by the Internal Revenue Service to collect the debt owed on student loans. When this happens your collection fee is not included with the intercept of your tax refund by the government.

Default also can impact Social Security; the government can offset federal workers' wages up to 15%, including military, in order to repay their debts. A temporary fix to this is to request a hearing due to hardship, which must be followed up by a separate hearing every 12 months while in default. The only permanent fix to default is paying off debts.

There are many other consequences of default. Lawsuits, can occur which takes up a person's time and money to pursue case. If a person is facing default they are ineligible for Federal employment, and cannot partake in Medicare if there is default of Health Education Assistance loans.

If students find themselves in default due to neglecting loan payments they are at risk for serious penalties. However, the consequences of default can be cured through rehabilitation or consolidation, which will be a subject of another blog.

Works Cited

Cohen, Joshua R.I. Student Loan Law Workshop. Law Office of Joshua R.I. Cohen, LLC, 20 Apr. 2013.

National Consumer Law Center, Student Loan Law (4th ed 2010).

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