Student Loan Default: 7 Reasons It Is A Bad Idea
Student loan default is an option that many desperate student borrowers are considering. The idea is, “What can they do to us if we just refuse to pay?” Look, we get it. It can be overwhelming paying back six figures, especially when the only job offers that you have on the table are for $15 an hour.
But you need to start thinking now in terms of the long term. Keep your nose to the grindstone. If you keep pursuing a viable career path, your salary will improve. In the meantime, doing the responsible thing and making the minimum monthly payment will keep you from aggravating the problem.
In this article, we examine why you don’t want to default on your student loans. We also discuss some better alternatives to the knee-jerk reaction of not paying. Without further ado, let’s begin!
1. Student Loans Are Federal In Nature
The federal nature of most student loans is enough to give one pause. At least, it is enough to give one pause from defaulting on the payments. That’s because the federal government has far more resources at their disposal to go after delinquent accounts.
While much of the current federal pressure is to forgive student loan debt, that hasn’t happened yet. Furthermore, it’s unlikely to happen. That’s because the two main ideologies running Washington are split down the middle and require two-thirds majorities to enact any major legislation.
A spurned federal government can go after your wages. They also issue the kind of debt that isn’t dischargeable in a bankruptcy proceeding. That means they could garnish your paychecks, right up to and including Social Security.
2. Student Loan Default Hurts Credit
Like any debt that you choose not to pay, it will reflect in your credit report. Defaulting on the loan won’t make it go away. And even if you choose to proceed anyway, it’s going to hammer your credit score for the next seven years.
That means it will be difficult affording a decent car, a home, or any other major purchase that you can’t afford to pay for in cash at the time of purchasing. You may not be overly concerned about that while you’re still in school or newly graduated. But it will catch up to you if the car you’re driving goes down or you decide to start a family.
3. Defaulting Can Hurt Future Prospects In Many Ways
We’ve already alluded to it, but it deserves emphasis. Imagine that you’ve just gotten married or plan on moving in with a loved one. You want to buy a house. Their credit is decent, but you’ve defaulted and yours is terrible.
The dream house you want is going to need sterling credit reports from both of you. That’s especially true since you don’t have the 20 percent downpayment. Unfortunately, your report is making you ineligible for the loan. Not only does this result in you not getting the house you want, but you also face tension in your relationship for being the “irresponsible” one.
These scenarios play out just like this all the time when poor credit is involved. You simply can’t have access to the same things as everyone else. And while bad credit should never be a factor in employment decisions or insurance pricing, it usually is.
4. Refusing To Pay Can Lead To Other Legal Issues
Refusing to pay starts a fight with the US government that you probably don’t want to start. The Internal Revenue Service (IRS) has amassed a fearsome reputation for delinquent taxes. While it may not be the same people going after you for federal loan repayment, there’s not a big difference.
The government always holds the power to garnish your wages. Furthermore, if it’s found that you are fraudulently claiming that you can’t pay, then you could be facing additional fines, penalties, and punishments.
Don’t pick a fight with Washington. That’s a fight that you can’t win.
5. Student Loan Default Is Unnecessary
Another reason to reconsider student loan default is that it’s completely unnecessary to do so. The terms of repayment are some of the most flexible you’ll ever face. Simply making the minimum payment will keep the government wolves at bay. And thanks to the lower-than-usual interest rates, you won’t rack up a lot of additional debt as a result.
If you do fall into a financially tight spot, you can always get a forbearance on your loan until a time when you’re better capable of paying. Last but not least, there are forgiveness programs out there that you can be eligible for as long as you keep making your minimum payments. As a result, you may not even end up paying close to the full debt.
6. Defaulting Will Cause More Stress Than It Solves
Ultimately, the decision to default on a student loan will cause more harm. You may think that resigning yourself to it will help you find peace, but that’s simply not the case. It’s not the case because it is not a dischargeable debt.
Even if you were to commit credit suicide and declare bankruptcy, the loan would still be there. The only difference between this and other non-dischargeable debt is that the creditor pursuing you for it is the federal government, an entity with virtually no oversight.
You have to make a decision on what kind of stress you prefer. The kind that you can eventually get rid of or the kind that follows you to the grave (and beyond, since the government has the power to go after more than just you to collect on that debt).
7. Student Loan Default Could Harm Your Future Family
Family may not be the biggest concern to you when you’re just taking on your student loans. However, it can become that way once you get older, especially if you’ve made the decision to default on them. That’s because the government can come after your family for repayment even after you are gone.
They can do it through the seizure of inheritance funds that you leave behind. They can do it through any Social Security payments that would go to your family in the event of your untimely demise.
There is no source of income that they cannot get to if they choose to. (And believe us, they will choose to do so.)
3 Alternatives To Defaulting On Your Student Loans
By now, you know that paying off those student loans — or at least continuing to be responsible with your stewardship of them — is the way to go. The repercussions of not are simply too great. So, if you have been thinking of that as an option in your desperation, slow down. There are better pathways to handling the burden, and we’re about to share three with you. Let’s continue.
Make the Minimum Monthly Payment
The minimum monthly payment on a high-interest credit card is designed to keep you in debt. And with “high-interest” going to as high as 30 percent, it’s possible to make all your minimum monthly payments and never pay off your debt. That’s predatory.
Government loans, such as the kind that you’ll get through the federal Stafford Loan program, are different. Making the minimum payment actually reduces the principal and ensures that you make it to balance-zero in a set period of time.
Keep making the minimums at all costs. Don’t ever feel compelled to pay more than that. You’ll get to where you need to go without putting yourself further into financial arrears. Your creditors (the US government) will never turn up the heat on you as long as you keep making that payment every month.
Take Advantage Of Forbearance Programs When You Have To
If you do run into trouble with making the minimum monthly payment, don’t panic. Call the loan service provider. Explain the situation. Tell them you would like to request a forbearance.
A forbearance allows you to delay making regularly scheduled payments until you’re in a better position to do so. While you’re allowed a six-month forbearance at the beginning of a loan period, you can work with the government to negotiate additional terms throughout the life of the loan.
Doing so does a couple of things. It frees you up mentally to not worry about the payments until you’re in a better position. It also helps you maintain a decent credit score during the affected periods of time.
Look Into Forgiveness Programs
Last but not least, inquire about loan forgiveness. The way these programs typically work is that you formally make your case or work for the government for an agreed-upon number of years. At the end of that time period, you have the remainder of your debt discharged. The key is to follow the administrative requirements and continue making your minimum payment during the prescribed period. You have to work at it, but it beats waiting for Congress to do anything about it.
Take Action On Your Student Loan Before You Default
The decision to submit to student loan default is truly a bad idea. We know it can be tempting when you’re in the throes of finding money for the payments, but the long-term repercussions simply aren’t worth going that route. We hope that you’ll pursue one of the alternatives before you go that far.
What are some things that you have done to cope with your student loan debt while remaining in good standing? Share your tips and tricks with us in the comments section below!
[Featured Image by Max Pixel Creative Commons License]