The consequences of student loan default depend on whether you default on federal loans or private loans.
When you default on federal student loans, your Department of Education loan servicer will first send your loans to the Debt Management/Default Resolution Group.
From there, the DRG will send your loans to a collection agency.
The collection agency is authorized to:
send a wage garnishment order to your employer
offset your tax refund and
send a garnishment order to offset your Social Security benefits
Consequences of defaulting on private student loans
Defaulting on private student loans have less severe consequences.
Private student loan lenders don’t have the same collection powers as does the Department of Education.
When you default on a private student loan, private lenders cannot automatically garnish your wages or garnish your bank account. Instead, the only things they or the collection agency they hire can do to collect the outstanding debt is:
demand you pay your student debt
report your late student loan payments and default status to the credit bureaus and
sue you for your unpaid debt
In my experience, private lenders typically wait until the statute of limitations is close to running out before they sue.
So if you’re thinking of defaulting to negotiate a student loan settlement, you shouldn’t have to worry about a lawsuit for a few years.
Damage to credit report
One other consequence of defaulting on either federal loans or private loans is the interest rate increasing on your credit cards and other financed debt.
Here’s how that works.
When you default, the monthly payments you missed will be reported to the credit reporting bureaus. Those late payments will cause your credit score to drop. And when your credit score drops, that can trigger a clause in your other debt that allows them to increase your interest rate.
Learn More: How Long Will Student Loans Stay on my Credit Report?