Once you take out a student loan, the only way out is to repay it. Defaulting on the loan will only bring negative consequences to your financial life. However, is it possible for borrowers to default and get a reprieve for their actions?
Some people believe it’s possible. In fact, a sizeable number of borrowers have already defaulted on their loans as a way of protesting the worsening student loan crisis. Others have done it hoping to clear the debt through bankruptcy. Regardless of the reason, defaulting on loans come with serious negative consequences, which is why it’s crucial to understand you are about to get into before going down this road.
This article examines the student loan crisis, what protesters are saying about it, and how defaulting on your loan can affect your finances.
Do the Pros of Defaulting Student Loans Outweigh the Cons?
Student loans are at an all-time high—$1.56 trillion—and this is from about 45 million Americans. However, Forbes says at least 1 million graduates default on their federal student loans every year. On the other hand, Brookings Institution predicts that around 38% of those who enrolled in college between 2003 and 2004 will default their loans by 2023.
This begs the question, at what point is one considered to be a defaulter or a delinquent? For federal student loans, delinquency occurs after missing a single payment and becomes defaulted 270 days after the missed payment. For private lenders, the rules vary. However, the timelines are much shorter. For instance, you’ll be considered a defaulter on a CommonBond student loan three months after missing a payment
Many borrowers who end up defaulting on their loans do so because of financial constraints. This is in addition to a lack of basic money management skills. Having said that, some borrowers make a conscious decision to default as a way of protesting the industry. According to Lee Siegel, the increased default rate is an indication of the need to change the current system of higher education and lending. The author adds that this move would expose the Department of Education and the collection agencies as greedy vultures.
He continues to say that this may force the Congress to think of a certain universal education tax which would make college education affordable. Siegel and millions of Americans consider the student loan system to be an immoral one. In fact, several student loan activists label this as “economic terrorism.” According to them, a mass default seems to be the only way out.
However, as much as a mass default would attract massive attention, its feasibility is questionable. This is because to default means putting the borrowers’ finances at risk; in fact, their finances will take a serious hit.
Student loans aside, some borrowers default on other payday advance loans to wipe their debt by reaching a settlement with the lender. The latter is difficult to achieve with a student loan, but that’s not to say it’s impossible.
If you choose to reach a settlement, some debt collectors and private lenders may agree to settle should you default. A collector may agree to a certain reduced sum if you have a private student loan.
However, there’s only so much time for a private lender to seek legal action. In fact, the lender cannot seek legal redress to collect once the statute of limitations expires.
While defaulting on private student loans might seem like a great idea, chances are you’ll have to make several appearances in court. Even worse. you may not get a favorable outcome. It’s wise to seek alternative strategies such as repayment assistance, forgiveness, or student loan discharge.
Why Defaulting on Student Loans May be a Problem
It doesn’t matter what your thoughts are about college costs or the student loan industry at large, you’ll have to deal with numerous negative consequences should you consider defaulting. Remember, private lenders can sue you and demand full repayment.
On the other hand, the federal government has several ways of collecting. They include:
- Blocking you from ever receiving financial aid in the future.
- Preventing you from selling or buying real estate.
- You can lose eligibility for forbearance, deferment, or any other repayment plan.
- Demanding full and immediate interest and balance repayment.
- Suing you for any costs associated with the collection process.
- Garnishing your wages, Social Security benefits, and tax refunds.
These are just some of the methods the federal government may use to pursue you. In addition to these consequences, your credit will take a massive hit due to the lender reporting your missed payments to credit bureaus. This will stain your credit for at least seven years and will affect your financial future, considering the poor credit status you’ll get from this situation. Loans will carry high-interest rates, that is if you can qualify in the first place.
Also, if a cosigner helped you to get the loan you defaulted on, their credit will suffer negative consequences.
Therefore, before you take the step to default on your student loan, take the time to understand the negative consequences of waiting on the other side. This applies to both you and anyone else on the debt.
Strategies to Use to Repay Your Student Loan
No one defaults on purpose, especially with the knowledge of the negative consequences that will follow. The problem is finances are probably tight, which means paying bills and keeping up with monthly payments is almost impossible. Are you already a defaulter? Consider loan consolidation or rehabilitation.
On the other hand, if you’re still paying off your loan, but having a difficult time, consider various strategies to help manage your debt so as to avoid missing payments. If you have a federal student loan, take a look at these repayment plans:
- Extended repayment – This plan lowers your monthly paymenhttps://studentaid.ed.gov/sa/types/loansts, which means your repayment period will go up to 25 years.
- Income-driven repayment plans – With these plans, you can adjust your monthly payment to 10, 15 or 20 percent of your discretionary income.
- Graduated repayment – This plan will lower your monthly payments and later increase them and spread them throughout 10 years.
- Forbearance or deferment – This will only be possible for those who qualify. For instance, you could be going back to school or be in great financial hardship.
Pausing or lowering your monthly payments gives you more room to breathe financially. As a result, there’s no need to worry about defaulting on your student loan or denting your credit.
Federal student loans offer multiple options for repayment options. However, private lenders don’t offer such flexibility. Nevertheless, you can still find some who can let you pause your payments through forbearance or deferment. It’s important to first consult your lender on whether they allow such benefits before defaulting.
Student loan refinancing is also a worthy consideration, regardless of the type of loan—federal or student. By refinancing, the lender may lower the interest rate, thereby saving you money. Furthermore, you also have a chance to choose new loan terms.
Keep in mind, this option is only available to borrowers with solid credit. If you don’t have it, consider getting a cosigner. In addition, you’ll lose federal protections if you choose to refinance federal loans, a risk you may not be ready to take.
Regardless of which loan you’re repaying at the moment, there are ways you can use to repay them. They may be burdensome or seem unfair, but managing your debt will help you overcome this burden fast and without going into default.