So what can Uncle Sam do if you don't repay your federal student loans?
- Report you to credit reporting companies.
- Garnish your wages.
- Keep your tax refunds and Social Security payments until the debt is paid off.
That's right, all of the above. Only most people aren't aware of it. Economists and researchers at the Federal Reserve Bank of New York asked this of more than 1,000 consumers - only to discover that less than one-third of them correctly answered that the government can take all three steps.
Student loan debt has ballooned to more than $1 trillion, outpacing credit card and auto loan debt, according to the Fed. While the federal government offers lenient repayment plans on student loans, the consequences are severe for those who fall far behind. The reason behind the New York Fed's polling was to see whether consumers understood the consequences.
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The survey found that 41 percent of respondents thought the government would report delinquent debt to credit bureaus, and 41 percent said wages could be garnished. Only about half knew that the government can go so far as to keep tax refunds and Social Security benefits to recover unpaid debt. Just 37 percent knew that it's "highly unlikely" that student loans - federal or private - can be wiped out in bankruptcy.
This isn't just a twentysomethings problem. Parents who take out federal PLUS loans to cover any tuition shortfall for a child's education can suffer these same repercussions if they don't repay.
Additionally, parents or graduate students without stellar credit can still qualify for a federal PLUS loan if someone else agrees to be an "endorser" on the loan, similar to a cosigner on a private loan, says Mark Kantrowitz, publisher of Edvisors Network. The government could use its collection powers to seek repayment from an endorser if the PLUS borrower defaults, he says.
According to the Fed survey, respondents with lower "student loan literacy" tended to be consumers ages 55 and up.
Concerns about older adults shouldering education debt were raised last year by AARP legislative policy director David Certner. Writing to the Consumer Financial Protection Bureau, Certner noted that 11 percent of households ages 50 to 64 carried an average of $28,090 in education debt in 2010. That's up from 7 percent of such households in 1989, when the average education debt was $8,039.
For these households, increasing education and other debt "threatens their ability to save for retirement or accumulate other assets, and may end up requiring them to delay retirement," Certner wrote.
Besides seeing their Social Security payments garnished, he said, older consumers delinquent on federal debt aren't eligible for federally insured reverse mortgages.
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It's not that students and parents aren't forewarned.
Student borrowers must undergo counseling about loans when they first get a federal loan and before graduation, Kantrowitz says. And the consequences of not repaying a loan are spelled out in the promissory note.
"The parent doesn't go through entrance or exit counseling," he says. "The premise is that they read promissory notes and all the details."
However, borrowers receive a huge pile of paperwork and warnings easily can be overlooked, he says. Disclosures could be improved.
"You could have a black box warning: Student loans may be hazardous to your wealth."
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