NEW YORK (MainStreet) — Student loan borrowers who are in a quandary because of a recent job loss should consider paying their federal student loans a first priority.

That's because the consequences of not paying federal student loans after nine months are dire: your wages and taxes can be garnished and your credit score knocked down several hundred points. And declaring bankruptcy won't get you out of Dodge; you're still accountable for both private and government-backed student loans if you file for Chapter 7 or 13, with few exceptions.

That leaves student loan borrowers vulnerable and the money they earn imperiled. 

Confronting Debt Reality

Consumers struggling with paying their loans should avoid defaulting at any cost, because it can be the "worst financial mistake a young person can make," said Sara Hamilton, an attorney who practices litigation at an Atlanta firm and who is herself diligently paying off both federal and private loans.

The policy of snatching hard-earned money out of the hands of defaulters is part of a system of incentivizing borrowers to be responsible about their loans.

"The federal government is using both carrots and sticks to encourage borrowers to pay their loans back," she said. "I believe borrowers who become delinquent or go into default will deeply regret doing so."

While student loans are daunting, especially if a consumers has borrowed a large amount, federal laws "often require that student loan servicers work with borrowers on their federal loan payment plans," Hamilton said.

As students are borrowing more money than ever to finance an undergraduate degree across all income groups, figuring out the long-term effects of missing federal student loan payments is critical. The standard amount of cumulative student debt for an undergraduate degree increased to $26,885 for the class of 2011-12 (figures adjusted for inflation) from $12,434 for the class of 1992-93 according to a 2014 analysis conducted by the Pew Research Center. With debt rising, defaults follow suit.

A Long History of Negligence: Chewing Away at Your Salary

Negligence, when it comes to student loans, has consequences that quickly snowball. 

The timeline for penalties on federal loans is much shorter than for private ones. After you miss a payment, the automated robotic phone calls start. Once you miss two months of payments, get ready for more calls from the lender -- this time from a live person.

Knowing when you have to call the loan guarantor to discuss options is crucial, because government-backed student loan guarantors won’t work with you after it’s been nine months.

After 60 days of not paying, your score credit will take a “serious hit,” and the lender will report the delinquent payments to the three credit bureaus, said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

“Since your student loans are likely the largest portion of debt on your credit report, maintaining on-time payments to smaller balances like credit cards won’t do much to help rescue your credit score if your student loan slips into default,” he said.

After 90 days, lenders are prepared for borrowers to default on their loans. Once it has been nine months, consumers have officially defaulted. Even if you believe you have exhausted all of your options, work out a plan with your lender before the situation becomes this serious. When you reach this level, you are not eligible for deferment, forbearance or repayment plans, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.

Even worse, you cannot receive any additional federal student aid, and the entire unpaid balance of your loan and any interest is immediately due and payable. Once a default is reported on your credit score, getting approved for a credit card is extremely difficult unless it is a secured card. And just forget about buying a car or house.

The consequences of a default can be further severe, because both your federal and state income tax refunds may be withheld, Triggs said.

“This means that the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt,” Triggs said.

Unlike private student loans, federal loan lenders can also move through the process of garnishing your wages quickly, sometimes in a matter of a few weeks. Since they do not have to go court and wait for a judge to approve garnishing your wages, once they sue you, these lenders can “go straight for your paycheck,” McClary said.

While federal lenders are limited to taking only 10% of your salary, compared to private lenders who can garnish up to 25% of your salary, there is no buffer for extra time before the clock starts, he said.

Text-Book Escape Plan

“When you know you are running into trouble, talk to a student loan counselor and identify options before things get bad because the options get fewer and the consequences more severe,” McClary said. “If you see a pink slip in your future, now is the time to pick up the phone and talk to lender or counselor.”

The process for private loans is longer and can take several months because the case is placed on the docket, and then the lender has to wait for a judge has to approve the garnishment. Private loans can sit on the docket for 30 days or longer. Even after it is approved by a judge, consumers can still communicate with the lender and work out an arrangement.

“You can delay or postpone the process on private student loans, depending on the rules in your state,” he said. 

"If you have problems keeping up with federal student loans, they offer repayment modification, consolidation and rehabilitation options to assist those in need," said Triggs. "Federal student loans offer deferment options that won't harm your credit when you can't repay."

Attacking the problem directly is ultimately the only solution, otherwise consumers will face years of regret, said Hamilton, the Atlanta lawyer.

"They must educate themselves about the options available and resist the temptation to bury the difficult issue," she said.

Aftermath of Garnishment

Once you have defaulted, getting the student loan debt repaid quickly will help you obtain a credit card again or a car loan at a decent interest rate.

Having a default is the worst occurrence on your credit report. If you borrowed a significant amount to attend college compared to someone who only owes a few thousand dollars, the default results in a “nuclear effect and puts your credit score into the basement around the 500 level,” said McClary.

Lenders will not approve you for traditional loans such as a FHA or VA mortgage, said Mark Kantrowitz, publisher of, a Las Vegas-based college planning and financing company.

Many landlords and employers examine your credit report first, so it might be harder to rent an apartment or get a job.

After paying your student loans on time for a year consistently, your credit score will start to recoup, although it is not a game changer.

As your student loan balance decreases and more time has lapsed since the default, your credit score will continue to rise. The default is only removed from your credit score seven years after your last activity or payment.

“When borrowers refuse to pay their federal student loans, they are only hurting themselves," McClary said.

The consequences of a defaulting includes diverting up to 15% of the borrower’s Social Security retirement and disability benefit payments without a court order, said Kantrowitz.

“The debt does not disappear when the borrower retires,” he said. “It is not subject to statutes of limitation."