If you are worried about the consequences of not paying your student loans and are wondering if a lender can take your house as a result, the short answer is yes. However, this outcome is extremely unlikely, and it takes a long time to get to that point. The long answer is much more nuanced.
From Missed Payments to Delinquency to Default
Before you can get to the point where any of your assets are at risk, you have to default on your loans. You are not considered to be in default until long after you’ve started missing payments.
When you miss a payment, your account becomes delinquent. Most lenders have a grace period, so missing a payment by a week or so is not typically a problem. Once payment is 30 days past due, private lenders may notify credit bureaus. Federal loan servicers, however, don’t notify credit bureaus until you are 90 days delinquent.
While notifying credit bureaus can lower your credit rating and make it difficult for you to borrow money in the future, the extent of the damage at this stage ends there. A loan must be delinquent for longer before further action is taken.
At 270 days past the first missed payment for a federal loan, and as soon as 120 days past the first missed payment for a private loan, your account goes from being delinquent to being in default.
Consequences of Going Into Default
Once in default, the entire balance of your loan, along with all late fees and unpaid interest charges, becomes due immediately. You may also be liable for collection fees.
The lender will want to collect what they are owed. If you have defaulted on a federal loan, they will likely initiate a wage garnishment and/or garnish any Social Security benefits or tax refunds you are owed. Wage garnishment for federal loans is limited to 15% of your net income. A notice will be sent to your employer, and they are legally required to send that portion of your paycheck to the government.
If they are unable to recuperate the funds via garnishment, then they may move to seize your assets. This can include freezing your bank account and recuperating the money from there but can also, in rare cases, go as far as putting a lien on your home.
If the loan you have defaulted on is private, then the lender must go through a court process to recoup their funds. A judge must issue an order to have your wages garnished or assets frozen. Wage garnishment for private debt is usually capped at 25% of your net income. However, they cannot touch any public benefits you receive.
It’s worth noting that while federal student loans have no statute of limitations for seeking repayment, private loans do. This statute varies by state and may even be as little as three years.
Whether your assets are seized depends on many factors, including whether the lender or collections agency believes they will eventually be able to get the funds from your wages, the value of your assets, and the effort they are willing to put in to go through the complicated and lengthy process of asset seizure.
What If I File for Bankruptcy?
If your student loans are not the only bill you can’t pay, and your debts have been piling up, you may have considered filing for bankruptcy. Depending on your financial situation and the type of bankruptcy you file for, you may have some of your assets liquidated to pay off your debts, although assets such as your house are generally excluded. Some of your unsecured debts may be forgiven, and the rest may be paid off with a modified payment plan.
Student loan debt, however, is almost never forgiven due to bankruptcy. Only about 0.1% of those filing for bankruptcy even try to get their student loans forgiven, and only 40% of people in that tiny group succeed.
To get your student loan debt discharged in a bankruptcy proceeding, you need to prove that paying off the loans would cause undue financial hardship. Factors that meet these qualifications vary from court to court, but here are some basic things to consider:
- Whether making student loan payments would put you in poverty given your current financial situation
- Whether there is reason to believe your current financial hardship is likely to persist for the bulk of the repayment period
- Whether you have made good faith efforts to pay your student loans in the past
If you do manage to prove undue hardship, the court may discharge all or part of your loan. Alternatively, they may require you to pay it on different terms or at a lower interest rate.
What If I’m Disabled and Can’t Work?
For federal student loans as well as many private loans, if you become totally and permanently disabled, there is a process by which you can apply to have your student loans discharged.
Doing so requires you to provide documentation from the U.S. Department of Veterans Affairs, the Social Security Administration, or your doctor. Applications for a Total and Permanent Disability (TPD) Discharge can be filled out online, over the phone, via email, or via regular mail.
Your Co-Signer’s Responsibility
If someone co-signed your student loans, the lender might begin contacting them for payment as of your first missed payment. In fact, as the co-signer, they are considered just as responsible for the debt as you are. After all, the financial solvency of the co-signer is what allowed you to obtain the loan in the first place. The lender expects the co-signer to pay if you don’t.
All of the same consequences that befall the loan recipient for nonpayment, delinquency, and default can be applied to the co-signer. As such, the co-signer’s credit can also become damaged, their wages may be garnished, or their assets may be seized.
Being a co-signer is a big responsibility and shouldn’t be taken lightly. It is possible, however, to remove the co-signer or refinance the loan to relieve them of their responsibility, especially if you don’t want your inability to pay to impact them.
What to Do When You Can’t Make Your Payments
If you have a federal student loan, there are several programs in place to help if you are facing financial hardship.
- Forbearance: This system pauses your loan payments for a short period to allow you to overcome a temporary financial problem.
- Income-driven repayment plan: This is a repayment plan in which the amount you must pay each month is tied to how much you earn.
- Deferment: This system puts your loan payments on hold while you attend school or are on active military duty.
- Change your repayment plan: There are several repayment plans available, which can lower your monthly payment, including graduated repayment, extended repayment, pay as you earn, and income-contingent.
It is always in your best interest to contact your loan servicer as soon as possible if you are having difficulties making payments. It is in their best interest to get paid, so they are often happy to work with you to make arrangements that allow you to do just that.
Private student loans are a little different and may not have the same options for when you are struggling to repay, but again, contacting the loan servicer is your best bet. There is usually something that can be worked out that will be mutually beneficial.
It’s Never Too Late to Work Something Out
Whether you have let your payments lapse, let your account slide into default, or have made it to the brink of wage garnishment and asset seizure, there is still hope. Loan servicers and collections agencies would much rather work with you to come to an agreement instead of pushing matters further, which may prove time-consuming, costly, and even fruitless on their end.
Fortunately, there are many ways to turn things around long before your assets are seized. Visit CollegeFinance.com to learn about loan repayment options and how to get back on track. We’re dedicated to making sure you can make informed decisions with the knowledge you have.