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Falling behind on government student loans is likely to have other major financial consequences for borrowers, according to a new study by The Pew Charitable Trusts.
More than 80% of borrowers who have defaulted said they faced at least one additional consequence. The most common impact was a decline in their creditworthiness (62%), followed by collection fees (47%) and loss of eligibility for future federal financial assistance (37%).
Other consequences resulting from federal student loan defaults have included wage garnishment, suspension of professional licenses, and the offsetting of Social Security or tax refunds.
(The research organization NORC at the University of Chicago conducted an online survey on behalf of Pew in the summer of 2021 examining the experiences of borrowers, with a focus on those who had defaulted on a government student loan. The Sample included 1,609 respondents.)
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“Low credit scores can make it harder to get other types of credit that are important to borrowers’ financial lives, like home loans, auto loans and credit cards,” said Phillip Oliff, director of Pew’s student loan research project. “Despite these penalties, failure and re-failure rates are alarmingly high.”
Recently, U.S. Department of Education Undersecretary James Kvaal said that if the government is not allowed to go ahead with its sweeping student loan forgiveness plan, it could result in a “historically large spike in federal student loan arrears and defaults in the Covid-19 pandemic.” “
Many are not aware of the consequences of a payment default
The Pew survey found that many borrowers are unaware of the specific consequences of defaulting on their government student loan debt. For example, a third or fewer of respondents were aware of the possibility of collection fees or wage garnishment before they fell into arrears.
“The consequences of the non-payment are not only punitive, but also intended to reclaim the funds for the federal government,” said university expert Mark Kantrowitz.
In addition to the financial setbacks, respondents reported “a high emotional toll” associated with experiencing the aftermath of a default “with themes of sadness, depression and anger.”
A borrower is generally considered to be in default when they are between 270 and 360 days past due on their debt.
Federal student loan payments have been suspended since March 2020, when the coronavirus pandemic first hit the US and crippled the economy. They are scheduled to resume 60 days after legal issues surrounding the Biden administration’s student loan forgiveness plan are resolved, or by the end of August, whichever comes first.
Debt collection activities remain paused as long as the bills do so.
Defaulting borrowers get a “fresh start”
Fortunately, the US Department of Education is also offering federal student borrowers who have defaulted on their debt a chance to catch up.
Under the Fresh Start initiative, the 7.5 million delinquent student loan borrowers can return to repay with no amounts past due. The program was announced last spring.
Once officially launched, borrowers will first select a repayment plan at MyEdDebt.Ed.Gov or call the Department of Education’s Default Resolution Group at 800-621-3115, Kantrowitz said.
Your loans should then be transferred to a new servicer by the Default Resolution Group operated by Maximus.
After you’re matched with a new service provider and placed on a payment plan, the outage should automatically be erased from your records, Kantrowitz said.
However, the opportunity is temporary. Borrowers have a one-year window to switch to a new repayment schedule and start making payments when the bills’ Covid suspension is over, which could be as early as May. Take action as soon as you are able, Kantrowitz added, “to avoid the last-minute rush.”
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