Defaulted student loans will stay on your credit report for 10 years, or more in some states. This affects your ability to get a new loan in two ways: first, your credit score will drop significantly; second, your report will show you defaulted and make future loans much harder to obtain. Ultimately, a default on student loans is very detrimental to your credit and should be avoided at all costs.
Credit Score Decrease
Your credit score is a measure of your total performance on debt. Factors taken into account include: late payments, payments made on time, total credit limits, percentage of credit limits being used currently and total number of debts and other soft factors such as collateral placed on loans. Your credit score is the first thing a lender will see about your financial stability. Credit scores are used by more than just lenders; landlords, employers and other persons may ask for a credit inquiry to determine how responsible you are. A default is among the worst reports that can hit your credit. A default will drop your credit hundreds of points. This will not only make it harder to get a new loan in the future, it will also end up making that loan more expensive.
Installment Loan Default
Student loans are usually installment loans. This means a principal is distributed up front then paid off in monthly payments or "installments." Other examples of installment loans include car loans and mortgages. Credit cards and other lines of credit are revolving debt. With revolving debt, you decide how much to borrow each month and how much to pay off. Having delinquent credit card payments is a problem on your credit report, but an installment default is a more significant issue for future lenders. When you default on an installment debt, other installment lenders will be weary. Installment loans tend to be the largest and most expensive loans you will take in your life time. They are also the hardest loans to achieve. Defaulting on one will only make getting the next harder and more expensive.
Defaulting on a Federal Loan
If you have a federal student loan, the effects of default are far-reaching. First, when you owe money to the federal government, they have more power in seeking payment. They may choose to garnish your wages in order to collect on the remaining debt. Further, the federal government offers many loan programs you may want to take advantage of in the future. These include small business loan opportunities, farm and rural loans, micro-loans for nonprofit organizations and community businesses, government contract loans and even guarantees on private home loans.
When you default on a government loan, you are automatically disqualified from achieving another government loan in the future. This means you may not be eligible for a profitable government contract loan 20 years down the line because you failed to make the payments on your student loan. Avoid defaulting on government loans by seeking federally subsidized consolidation or refinancing options where possible.