If you’re swamped with a too-huge federal or private student loan debt load and are thinking of defaulting on your loans as a way to get out from under them, please, please, please think again: you’d be setting yourself up for some nasty, long-lasting financial consequences.
First, a little background (federal student loans; we’ll talk about private student loans later):
The U.S. federal government provides subsidized student loans to just about any student in the country who is looking to take college classes or technical training after high school. According to the New American Foundation, a non-profit, nonpartisan public policy institute, students in the U.S. took out about $100 billion in federal student loans in 2014.
Students don’t need to start repaying those loans while in school, but must start doing so immediately after a grace period has expired (the length of the grace period varies depending on the type of loan) once the student graduates, drops out of school or goes below half-time student status). The Department of Education has decided that a borrower has gone into default when he fails to make on-time repayment of his loans for nine consecutive months at any time after the grace period ends.
More than 610,000 borrowers were in default in 2015, a default rate of 11.8 percent (down from 13.7 percent the previous year. Please note that default rates are based on a rather complicated formula: these rates reflect borrowers whose federal student loans first became due during fiscal year 2012 but who then defaulted on the debt within three years.
The Department of Education credited the decrease in default in part to its efforts to ensure more borrowers know of its income-driven and income-based repayment plans.
As for private student loans – those taken out via banks, credit unions, schools, and other non-federal programs such as Sallie Mae – they also must be paid back as soon as a borrower leaves college, but often while the student is still in school.
Defaults also run high with private student loans, although the exact percentage is difficult to ascertain because private lenders say the private loan default rate was running around 3 percent in 2014, while the U.S. Department of Education said the percentage was more in the double-digits.
Defaulting on Either Type of Student Loan Has Very Undesirable Consequences
Default on a federal student loan and:
- The entire unpaid loan balance – as well as interest – must be paid immediately.
- You lose any eligibility you may have had for student loan repayment plans, as well as deferment and forbearance.
- You will be ineligible for any further federal student aid.
- A collection agency will receive your account.
- The default will be reported to credit agencies, resulting in major damage to your credit rating.
- Your wages can be garnished to the tune of 15%!
- The government can take your income tax refund.
- When a borrower goes into default, a penalty of 24% of the loan is added to the loan; this 24% penalty is added each year the borrower stays in default.
- Once a borrower is delinquent (not even default, and delinquency is defined by the servicer) the interest rate can increase by up to 6%.
- In some states you can even have your drivers license and professional licenses revoked for defaulting on federal student loans.
- And much more!
Let’s just talk about one of these consequences: the hit to your credit rating and what this could mean to your future.
Your credit is a measure of how well you honor your financial obligations. Companies look to it to see if they want to extend you credit for non-cash purchases. A company from which you’re asking for credit will look to the rating to see if you’re a good “credit risk.” If it sees a low rating, it may not lend you the money.
So how can this affect you?
It can affect your ability to purchase a house, buy a car, even get a job.
Mortgage lenders look to your credit rating before they give you a mortgage. If your rating states that you’ve defaulted on our student loans, you can pretty much expect that the company won’t give you the home loan. Think renting is safe? Think again. Many rental properties will pull your credit as well and may not rent to you if they believe you to be too high of a risk.
The same goes for car dealerships. The same goes for credit card companies, and if you can’t get a credit card, you may not be able to rent cars, purchase airline tickets, and so on. (Some card issuers may give you a card, but probably at exorbitantly high interest rates – possibly as high as 30 or 40 percent, or even more!) The same may go for employers: some employers do look at candidate credit ratings before hiring, and they may not hire someone with a poor score.
In essence, default on your student loans, and your ability to purchase a home, buy a car, find a job, go on vacation – all the things we in America believe are part of an average, good life – may not be available to you for several years after you default on your student loans.
We know that looking at your student debt can been intimidating, discouraging and maybe even terrifying, but there is hope. New Start Advisors can help guide you through your options and help you establish a more affordable payment plan. Contact us today to learn more about how we can help you take advantage of fantastic government programs or help you drastically reduce your interest rate. Before you default, contact us.