Consequences of Default

Defaulting has serious consequences:

  • The entire amount of your loan becomes due.
  • Your student loan debt will increase because of any late fees, additional interest, court costs, collection fees, attorney's fees, and any other costs associated with the collection process.
  • You will become ineligible for a deferment or forbearance on your loan.
  • You will become ineligible for any additional federal student aid.
  • You may become ineligible for assistance under most other federal benefit programs.
  • You will become ineligible for federal interest benefits.
  • Your loan account will be assigned to a collection agency.
  • You will be liable for collection costs.
  • The default will be reported to national credit bureaus, making it difficult to borrow money for a car or home, or get credit cards.
  • Federal and state government tax refunds may be withheld through a tax offset. Any federal or state payments that you are entitled to receive in the future may be seized for repayment.
  • A portion of your wages may be withheld at the request of the federal government in a process called wage garnishment.
  • You may not be able to receive or renew a professional license.
  • The loan holder can take legal action against you and you may not be able to purchase or sell assets such as real estate.
  • It will take years to reestablish your credit and recover from default.

HESC will work with you to assess your situation and help you enter a satisfactory repayment agreement. For more information, contact HESC at 1-866-991-HESC (4372).

  • Collection Costs
  • Seizure of Federal and/or State Payments
  • Administrative Wage Garnishment

Collection Costs

If you default on your student loan guaranteed by HESC, you will be charged collection costs mandated by the federal government. This fee, currently 15.25% of your payment, goes toward covering the costs of collecting your loan.

For instance, if you pay HESC $100 on your student loan, HESC will deduct $15.25 for collections costs.  The rest of the payment -- $84.75 -- will go first to any outstanding incidental charges, such as returned check fees, then to interest on the loan, and only then to the principal.

If you default on your Direct student loan or any student loan that has been sold to the U.S. Department of Education (ED), you will be liable for the costs of collecting your defaulted federal loan. You will receive repeated warnings and opportunities to establish voluntary repayment before your account is turned over to a collection agency, which may charge as much as 25 percent of your principal balance and interest to cover collection costs.

On each billing statement, an estimate of the total amount needed to satisfy the debt on the date of the statement is projected, including collection costs that would be incurred by payment in full of that amount.

Usually, collection costs can be avoided if you establish a repayment agreement within 60 days after you default and maintain that arrangement until your account is paid in full.

Seizure of Federal and/or State Payments (Tax Offset)

If you’ve defaulted on your student loan, any federal and/or state payments that you are entitled to receive in the future may be seized for repayment.

The IRS and New York State government will seize your federal and/or state payments if you’ve defaulted on your loan without making satisfactory arrangements for repayment, or if you have an open legal judgment against you.

A warning letter is sent to all borrowers subject to tax seizure.

To avoid seizure of your federal and/or state payments as well as other consequences of default, call your loan servicer and make arrangements to repay your loan.

Administrative Wage Garnishment

Your loan holder — the U.S. Department of Education (ED) or the guaranty agency — can order your employer to withhold up to 15 percent of your disposable pay to collect your defaulted debt. No court judgment is needed. This withholding, or "garnishment," continues until your defaulted loan is paid in full or removed from default.

When your wage is garnished:

  • Your loan holder will send you notice of the proposed garnishment at your last known address.
  • You have 30 days from the date of the notice to object in writing and request a hearing. If you fail to make a formal objection within 30 days, garnishment will start and will continue while your objection is considered and a decision issued.

Your loan holder will arrange a hearing on your objection. The hearing may be held in person, on the phone or may be based simply on records you submit to make your case. A decision on your objection should be made within 60 days from the day that your hearing request is received.

For details about garnishment or the hearing process, contact your loan holder.