Can Student Loans Take Your House?

A letter arrives from a law office threatening a lawsuit for payment on an old student loan. It’s upsetting but hardly rare. You or your cosignerCosignerA person who signs a loan agreement alongside the primary borrower and becomes equally responsible for repayment. Cosigners are common on private student loans when the student has limited credit or income history. may get hit with a lawsuit if you have old, unpaid student loans. If you don’t respond in time or attend the court hearing, the creditor will likely win. And if that happens, not only may it get the right to send a wage garnishment to your job and to take money from your bank account, but it may also be able to put a lien on your home. In this article, I’ll answer:

• Can student loans take your house?
• When will the government take your home for student loan debt?
• Options if student loans put a lien on your home

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• Can You Buy a House With Defaulted Student Loans?
• Do Student Loans Affect Buying a House?
• IBR Student Loans and Mortgage

Lenders offer two types of loans: secured loans and unsecured loans. A secured loan is tied to property like a house or a car. If you miss your mortgage payments, not only can the bank put derogatory marks on your credit report, but it may also foreclose on your home. An unsecured loan is entirely different. It’s not backed by any property. When you fall behind on payments, there’s no property for the lender to take. The bank has to sue you and get an order from a judge before taking any of your property. Student loans are unsecured loans. As a result, student loans can’t take your house if you make your payments on time. However, if you miss enough student loan payments, your accounts will first move into delinquencyDelinquencyThe status of a loan when a payment is past due but the borrower has not yet defaulted. Federal loans are delinquent from the first day after a missed payment and are typically reported to credit bureaus after 90 days. status and then into defaultDefaultThe status of a federal student loan after the borrower has failed to make required payments for 270 days. Default can trigger collection actions such as wage garnishment, tax refund offset, and damage to credit reports. status. Once you default on student loans, you’re at risk of having your house taken to pay them back.

When will the government take your home for student loan debt?

The federal government won’t take your home because you owe student loan debt. However, if you default and the U.S. Department of EducationU.S. Department of Education (ED)The federal agency that oversees federal student aid programs, issues regulations for federal student loans, and is the ultimate lender on Direct Loans. cannot garnish your wages, offset your tax refund, or take your Social Security Benefits, it may sue you. If the government gets a judgment against you, then it could put a lien on your assets, including your home. The easiest way to stop student loans from taking your home is to stay out of default. If you can’t afford the monthly payment your loan servicer is demanding, explore your repayment options. You may be eligible for a repayment plan based on your income and family size. You may also be able to switch to the Extended Repayment PlanExtended Repayment PlanA federal repayment plan that stretches payments out up to 25 years for borrowers with more than $30,000 in Direct or FFELP loans. Monthly payments are lower than the Standard Plan, but total interest paid is higher., which starts with a lower payment and then increases every two years. And if those payments aren’t affordable, ask for a deferment or forbearance. Already in default? Here’s how to get out of student loan default fast, either through consolidation or rehabilitationRehabilitationA federal program for borrowers in default that requires nine voluntary, on-time monthly payments over ten months. After rehabilitation, the default is removed from credit reports and federal aid eligibility is restored. It is available once per loan., before things escalate further. Can private student loans take your house? Until you default on private student loans, your house is safe. Private lenders must sue the borrower and get a judgment before putting a lien on a home or taking money from a bank account.

Options if student loans put a lien on your home

You have four options if student loans have a lien on your home:

• Negotiate a payoff. Depending on your financial situation, you may be able to offer the loan holder a lump sum payment to remove the lien from your property. Contact the law firm that sued you and ask them about your settlement options. It’s not uncommon to negotiate a settlement for 50% of the current loan balance paid in a lump sum.
• Filestudent loan bankruptcy. By itself, filing a Chapter 7 or Chapter 13 bankruptcyChapter 13 BankruptcyA form of federal bankruptcy in which the debtor follows a three-to-five-year court-approved repayment plan. Student loan balances remaining after the plan are not automatically discharged and require a separate adversary proceeding. won’t remove the lien. You’ll need to open a bankruptcy case and then file an adversary proceedingAdversary Proceeding (AP)A separate lawsuit filed within a bankruptcy case, required to seek discharge of student loans. The borrower files the AP against the loan holder and asks the court to find undue hardship. asking the court to get rid of your student loan debt and the judgment. You may be able to do the same thing even if you’ve already filed for bankruptcy.
• Ask to pay the lien at closing. If you’re trying to refinance your home, ask the creditor if it’s willing to lift the lien so you can close. This option is a long shot. But you have nothing to lose.
• Try to set aside the judgment. If you don’t remember being sued, find out where the lawsuit was filed at. Contact a lawyer near that location to find out the rules for setting aside the judgment. Depending on how long it’s been since the court entered the order, you may be able to show the judge you didn’t have a chance to defend yourself.

What you risk losing with defaulted student loans

Here are other consequences when you don’t pay your student loans:

• late payments are reported to the credit bureaus and added to your credit history for 7.5 years
• default status for federal student loans is reported to CAIVRS, making you ineligible for an FHA home loan
• ​increase down payment necessary to get a conventional mortgage
• money may be taken from your paycheck, bank account, tax refund, and Social Security Benefits
• entire loan amount (principal, interest, and collection fees) becomes due
• accrued interest may be capitalized
• lose eligibility for new federal student aidFederal Student Aid (FSA)The office within the U.S. Department of Education that manages federal grants, work-study, and student loans. It runs the FAFSA, the StudentAid.gov website, and oversees the federal loan servicers.
• ineligible for student loan forgiveness (you remain eligible for total and permanent disability discharge)

Protect your home from student loans. Get out of default.

Defaulting on student loans can wreck your finances, your credit score and threaten your home. So do everything you can to stay current. If you’re struggling to keep up, find a repayment plan that works for you or look into refinancingRefinancingTaking out a new private loan to pay off one or more existing student loans, usually to lower the interest rate or change the repayment term. Refinancing federal loans into a private loan eliminates federal benefits like IDR and PSLF. for a lower interest rate. Let’s talk if you need help exploring your options. Schedule a call. No matter if student loans already have a lien on your home or if you’re trying to stop that from happening, I may be able to help.