By Michael Pope of Nerd Wallet
Student loans have unfortunately become a growing necessity for anyone with a desire for higher education, and the debt that comes with it is commonplace to an entire generation of young people. The amount of debt that is now carried by continuing education graduates has grown from $90 billion in 1999 to a whopping $550 billion in 2011. Furthermore the average student loan debt for graduates in 2010 was $25,250. With so many people unable to find work, and such staggering and various amounts of debt the idea of defaulting, and the misconception that this will wipe the slate clean can admittedly become an attractive option.
Unfortunately, this is not the case. Defaulting on your student loans can have real and long term damaging effects to your prospects and progress in life.
What happens when you default?
A default on your student loans—or any kind of debt—means a failure to make payments on your account. Typically a default happens after 270 days of nonpayment, but lack of payment starts being reported to credit bureaus after 90 days. Once your loan has gone into default the full balance becomes due immediately. So instead of being responsible for a monthly payment of $140, for example, you are now responsible for the entirety of the loan all at once. This is the beginning.
Your loan will also be handed over to a collection agency. They will add other fees for having to process the collection of your loan. You will also no longer be able to collect a tax refund, as that money will be used to repay your loan. If the collection agency doesn’t make any headway with making a payment plan with you, then you most likely will be sued. Filing for bankruptcy will also do nothing to eradicate student loans, unlike other forms of debt.
Now, as bad as this is, it is not even the most lingering problem that will hold you back. As stated above, your lack of payment is reported to the three major credit report agencies. As a result of going into default and possessing a lackluster credit score; you may no longer be able to apply for a credit card, a mortgage, a car, new student loans should you decide to go back to school and even possibly a cell phone. Even if you do happen to be approved, you will end up paying substantially more in interest rates than if you had never defaulted. A negative credit score can even hurt your chances of employment. Employers commonly do background checks on prospective candidates. These are often no longer limited to criminal background. If you show to be unreliable in paying off your loan obligations, an employer can easily assume that you will shirk responsibilities in the office as well.
How to avoid default, and dig yourself out
It may be hard to believe that defaulting on a loan can come as a sudden shock, and this is primarily true. Most often you will see the warning signs of default—like chronic missed payments—coming a mile away. However, sometimes missing a payment can snowball after losing a job, or simply living outside your means. Whatever the case is, don’t become a ghost in the eyes of your loan company. It can be stressful getting late payment calls, but it is important to be in contact and honest with the representative you are dealing with.
If your monthly payments are too high, or you are making too little income, contact your loan company and try to negotiate a lower repayment plan. It may take you longer to repay your loan, but it won’t negatively affect your credit score by missed payments, and you can always increase the payments once you have a higher income. Second, whenever possible, consolidate your loans. This will make handling your repayments more manageable and concise. You can also often consolidate them into a lower fixed interest rate, which means shelling out fewer extra dollars.
If you have fallen into default it is important to take action immediately in order to alleviate the hit that your credit score will take. There are loan rehabilitation programs, which allow you to make repayments that are more reasonable and affordable. By working with your lender through a rehabilitation program, the default status of your loan can be lifted. Even if your loan has now been handed over to a debt collection agency, contact your loan provider to see if there’s any way you can deal with them instead and reach an amicable deal for both parties involved.
If you find you are falling behind on your student loan payments, consult the Consumer Financial Protection Bureau’s website. It contains a handy interactive section to pinpoint your exact situation and the steps you should take to remedy it.
Student loan debt has become an unfortunate fact of life, but trying to avoid it will only compound the burden. It may not seem fair, but being responsible and paying off the debt is really your only option. In the end—most likely when you’re in your 40s—you’ll be glad it’s over.