Written by James Hirby | Fact checked by The Law Dictionary staff
Every year, the credit scores of thousands of college graduates suffer at the hands of their defaulted student loans. Despite relatively low interest rates and numerous payment-protection safeguards, a significant proportion of each year's graduating class struggles with serious debt-related problems. The student loan crisis is even worse for non-graduating students. Those who drop out of college before completing a course of study tend to default on their obligations at far higher rates than the general student population. This problem has the potential to put a damper on economic growth and may ultimately hurt many student lenders' bottom lines.
To make matters worse for struggling college dropouts and graduates, the process of recovering from a student loan default is not easy. Unlike other "unsecured" loans like credit cards and medical bills, student loans can't be discharged during the course of a standard bankruptcy reorganization process. Unfortunately, student loans are subject to strict repayment and refinancing terms. If you've defaulted on one of these loans and want to get your finances back on track, you'll have to adhere to these rules. You'll also have to perform a number of tasks to the satisfaction of your lender.
If you are unable or unwilling
to do this, you could lose up to 25 percent of your wages and the full value of your tax refund to garnishment. With the blessing of a judge, your lender can continue to garnish your wages and tax refunds until your debts have been satisfied. Depending upon the size of your defaulted loan, this could take years.
In order to prevent the seizure of your wages and tax returns, you'll need to contact your lender and draw up a repayment plan. Under normal circumstances. this plan will require you to make several on-time loan payments. If you've recently lost your job or taken on new financial responsibilities, this could be difficult. However, it represents your only realistic chance of avoiding garnishment. Although you can file for bankruptcy and declare yourself subject to an unavoidable "economic hardship," this is difficult to do. Student loan debtors who file "hardship" claims must meet a strict burden of proof. Otherwise, they must adhere to the terms of their repayment plans.
Once you've successfully made several payments on your defaulted loan, you'll be restored to "good standing " with your lender. This will lift the threat of garnishment for the time being. However, you'll need to continue to make on-time payments for the remainder of your loan's term.