Defaulting on your student loans can have very serious consequences, especially if your loans are federal. The government has extraordinarily powerful tools to garnish your wages, seize your federal tax refunds, and offset federal benefits (such as social security), all without a court order. But even private lenders (as well as federal ones) can add penalties and collections costs to your loan balance, and they can report your defaults to credit bureaus, wrecking your credit. Any student loan lender can file a lawsuit against you, and then use the power of the courts to pursue you even further. I think of these as the “primary” or “direct” consequences of default, and they are no laughing matter.

But there are lesser-known consequences of student loan default that are more “secondary” in nature, yet they can be even more damaging to borrowers. These consequences don’t necessarily happen because a student loan lender or debt collection agency specifically takes a direct action against you (such as by issuing a wage garnishment order to your employer, or by filing a lawsuit against you in court). Rather, these consequences should be thought of as the “fallout” of the default. They happen not because someone pushed a button or filed some paperwork, but because of how our overall economic system works in relation to the student loan system. These consequences can be enormously destructive:

Loss of (or Difficulty Obtaining) Employment
It has become an increasingly common practice for employers to run credit and background checks on a prospective employee prior to hiring. This is true both in the private and the public sector. Many employers also conduct routine audits of existing employees. Student loan defaults and collections notations that appear on your credit report can severely damage your career prospects, or even jeopardize your existing employment. For example, most federal contractor positions, as well as jobs directly with the federal government, require that your federal student loans be in good standing. If they are not, you could be in trouble. The irony, of course, is that holding down a job may be the key to resolving your student loan defaults and repairing your finances. But default can literally lead to your unemployment.

Loss of Professional Licensure
Even worse than losing your specific job, or being unable to get hired by a particular employer, is the prospect of losing the license that allows you to work in your profession in any capacity. Doctors, nurses, lawyers, financial planners, and teachers are all regulated professions that require up-to-date licenses monitored by state agencies, and these are only a few examples. Many states, including Massachusetts, have laws that suspend certain professional licenses in the event that you default on your student loans. These laws vary widely from state to state in terms of the professions that are impacted, and the types of student loans that matter. But a student loan default can completely prevent you from working in the profession for which you obtained your education in the first place.

Loss of (or Difficulty Obtaining) Housing
Like employers, landlords often run credit checks on prospective tenants prior to renting out an apartment. A default and collections notation on your credit report can be an immediate red flag for a landlord, especially in a competitive housing market like Boston or New York. Moreover, landlords may run a credit check prior to re-signing a lease with a current tenant. This means that finding (and even keeping) adequate housing can be a huge challenge for people who have defaulted student loans.

Academic Transcript Withholding
If you owe a debt to your college or university (such as a Perkins loan or an unpaid tuition bill) and you fail to pay, many enrollment agreements include a provision that allows the school to withhold your academic transcript until the debt is adequately dealt with. Furthermore, even if you don’t owe a debt to the school specifically, many states, as well as the U.S. Dept. of Education, actually encourage private and state universities to withhold academic transcripts from former students until their federal or state student loan defaults are resolved. This means that if you want to complete an unfinished degree, or enhance your education and career prospects by obtaining an advanced degree or certificate, you may not be able to do so because you cannot access your prior academic transcript. It doesn’t matter if you can pay for the new educational program without a loan (such as through a merit-based scholarship or by paying out of pocket); if you can’t get that transcript, you’re stuck.

In many ways, these secondary, indirect consequences of default are so much worse than the primary ones, because together they create a system that can perpetually lock people in default and poverty. Instead of giving borrowers the opportunity to resolve their student debt problems and improve their lives, the system kicks them while they are down, and then holds them there.

I’ve said it before, and I’ll say it again: we need widespread, systematic reform.