Most student loans fall into two categories: federal student loans and private student loans. Federal student loans have unique rights and benefits. Private student loans are generally more problematic and are much more inflexible when borrowers have trouble making their payments.
Defaulting on your federal student loans is dangerous because the federal government can garnish your wages, seize certain federal benefits, and intercept your tax refunds, all without a court order. In some ways, this makes federal student loan defaults more dangerous than private student loan defaults, since private lenders need to take you to court first in order to forcibly collect from you. The flip side, however, is that there are usually clear ways of bringing federal student loans out of default: either through a special repayment program called “rehabilitation,” or consolidation. While private student lenders do not have the same collection powers as the federal government, rehabilitation and consolidation exist only for federal student loans; they not options for bringing private student loans out of default. (For more on default, check out my previous article on the subject.)
State-based student loans are, in my opinion, a monstrous hybrid of federal and private student loans. These loans are usually originated by a quasi-public state agency or a state-supported non-profit organization. Thus they are often very attractive to students who are seeking to avoid the big, bad banks and commercial lenders. Moreover, these loans often have somewhat more favorable terms than purely private student loans, such as lower interest rates, longer repayment terms, or more flexible forbearance options.
If you ever default on a state-based student loan, however, you’re in trouble. Many state-based lenders retain some of the scary collections powers that the federal government does: without a court order, the state can seize state benefits, intercept state tax refunds, and in some cases, garnish your wages. To make matters worse, because state-based student loans are not federal student loans, they are ineligible for federal rehabilitation or consolidation programs to bring the loans out of default. This means that, much like a defaulted private student loan, you’re effectively stuck with it, and there’s not a whole lot you can do unless you can reach a settlement agreement.
My advice? Avoid state-based student loans.