Student Loan Default = Potentially Having Your Tax Return Seized!
Did you know that to the federal government, defaulting on your student loans is considered almost as serious as not paying your taxes? However, can result in PAYING WITH your taxes (having your tax return seized). Being in an actual “default” status is sometimes just the beginning of the negative consequences that can take place. For example, You can have your tax return taken to offset the balance, current wages garnished, even have your driver’s license revoked! Many recent and soon-to-be graduates might be concerned about the possibility of student loan default. So here’s the cold hard truth about going into default… and some good news for you if you’re already in this situation.
First, it’s important to know what student loan default is.
You are considered in loan default when you have made no scheduled payments on your student loans for at least 270 days. This applies to anyone whose loans are currently considered in repayment. If your loans are being deferred because you are currently attending school at least half-time, or for any other reason, your loans will not go into default.
Student loan default can come with some pretty hefty penalties.
These may include:
(a) Serious damage to your credit report. The negative effect on your credit report created by loan default cannot be underestimated. Even if you’ve never been in default, the ability you’ve shown to repay/manage your student loans is one of the first things a loan officer may look at in addition to your credit rating when determining eligibility for a car or home loan (Debt To Income Ratio).
(b) Withholding of wages an/or Tax Return Seized. The government may decide to garnish your wages, a certain percentage being withheld from you and going directly to loan payments before the rest of your monthly paycheck reaches you. Other funds such as federal tax returns and lottery winnings can also be withheld. Of course, if you win the lottery, paying off student loans should be on the top of your priority list anyway.
(c) Professional license and transcript blocks. If you have earned a professional license, such as a medical, cosmetology, or real estate license, you can be prevented from receiving that license while your loans are in default. An even more common problem is a transcript block. Many jobs available to college grads require that you submit a copy of your college transcripts as a part of the application process. If your loans are in default, the school(s) you’ve attended are not allowed to release official transcripts to other institutions until the default is resolved. You can not pull out more loans to continue your education while they are in default either.
For most of us, it’s not easy to go into student loan default. No one (the schools, lender banks, guaranty agencies, or the federal government) wants you to go into default.
You do have options and resources to help you keep your taxes from being seized.
Deferment and Forbearance
A deferment allows the postponement of payments in cases of economic hardship, re-enrollment in school, or disability. Forbearance is a similar condition which allows for the lowering of minimum monthly payments based on your situation.
Alternate payment programs.
Rather than a standard loan repayment schedule, you may choose an income sensitive, graduated, or extended plan. Graduated and income-sensitive repayment plans may be a good option for those who are unsure how much they will be earning during their first years out of college, entering into an unstable job market or in a financial hardship. An extended repayment is an option available to borrowers with more than $30,000 in federal loans. It allows you to repay over a 25-year period, rather than the standard 10 years.
Under current federal loan programs, you may be eligible to consolidate your student loans. In essence, consolidation involves taking out a new loan with a lender bank or servicer to cover all of your current student loans. This allows you to work with a single lender bank (rather than multiple banks if you took out your student loans through more than one lender), may lower your monthly payments, and opens up whatever new payment options your consolidation may offer.
If you’ve already started missing payments, Then chances are you need immediate help! Don’t wait till after having your tax return seized, credit score affected or any of the other negative effects takes place before you decide to act.
Speak to someone now to go over your available options to help you decide the best options for you and your financial situation.