I’m having trouble paying off my student loans, should I let them default?

October 29, 2012

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.


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  • WorkSaveLive October 29, 2012 at 12:08 pm

    I feel like we’ve been paying off our student loans my entire life, but it’s only been 5 short years. We still have $45k worth of loans left, but I hope they’ll be paid off in a few years! Defaulting is something I’d try to avoid. Maybe take a hardship deferral or getting on a different payment plan.

  • Catherine October 29, 2012 at 12:44 pm

    I know in Canada there are options. There are debt repayment assistance programs (where the government temporarily takes over payments if you can prove financial hardship) as well as interest only payment options if short on cash for a certain time frame. Student loans/LOC’s suck. period. I borrowed over 100k in 6 years.

  • TB at BlueCollarWorkman October 29, 2012 at 1:52 pm

    Man, I never even went to school , but when I read the blog title I thought, “No, the answer is definitley no.” If yo’ure having money problems, you’ve gotta defer or get another job or … something. Man, don’t miss those payments!

  • Michelle October 29, 2012 at 2:20 pm

    UGhh student loans! I have around $35K (just recently started paying it down) and plan on it being gone by early next year. Can’t wait!

  • Glen @ Monster Piggy Bank October 29, 2012 at 11:06 am

    I’m not sure if this is the same in the US as it is in Australia, but over here are are able to pay for our college up front and save 25-30% of total cost.
    I did this and it has saved me about $7,000 in total.

    Obviously this is a substantial amount of money to come up with each semester, but if you can hold down a steady job and complete your studies at the same time you will never again have the burden of student debt.

    • Catherine October 29, 2012 at 12:46 pm

      Glen, is it also true that in Australia you don’t have to pay back your loans until you reach a certain income bracket or am I thinking of somewhere else?

  • AverageJoe October 29, 2012 at 3:54 pm

    It’s funny you mention age 40. I think it was just before that that mine were repaid. It’s a long, grueling journey. Great advice here.

  • Kurt @ Money Counselor October 29, 2012 at 5:53 pm

    Unless you become severely disabled or suffer some other extraordinary circumstance that minimizes or eliminates your capacity to earn money, you’re going to pay your student loans, sooner or later and one way or another. Student debt is among the toughest of debts to get out from under.

  • Canadian Budget Binder October 29, 2012 at 6:09 pm

    I would never default on any loan even a student loan of any kind. In Canada there is the interest only option if you can prove you are back in school or are having hardships. The problem with that is that some students don’t realize they are just prolonging the inevitable and continue to pay the interest only and of course costing them more money. My sister in law was doing that and now realized how silly it was especially since she is now budgeting and realized that should could have easily cut other expenses to fund the entire payment instead of paying the interest only. Either way loans are crappy but some people can use the assistance if it is available.

  • femmefrugality October 29, 2012 at 7:18 pm

    Another solution: get a job working for the government. They’ll pay your loans or forgive them.

    Whatever you do, don’t default! They never, ever go away.

  • Brick By Brick Investing | Marvin October 29, 2012 at 11:29 pm

    I have a friend who literally owes approximately $200k it is very sad situation. Like you pointed out you can’t default on student loans. If the government wants to get student loan under control it needs to allow students to default on these student loans. Only then will banks and other financial institutions become more responsible with the loans they issue.

  • John S @ Frugal Rules October 31, 2012 at 3:34 pm

    Good post. I hated having student loans, but was so glad once I aid them off a few months back. I would say, if at all possible to not default on them. If it’s an issue of being unable to repay for one reason or the other then I think the best thing to do is to contact the provider and see what options they can give you. It might mean that it will prolong the payments, but that’s much better than defaulting.

  • Andy Hough November 1, 2012 at 1:34 am

    Since student loans aren’t bankruptable there isn’t much point in letting them default. They won’t go away and someone will come to collect on them eventually.

  • Eric November 5, 2012 at 10:50 pm

    If it’s an issue of being unable to repay for one reason or the other then i guess the best thing to do is to contact the provider and see what options they can give you. it might indeed mean that it will prolong the payments, but that’s much better than defaulting.If it’s an issue of being not able to repay for one reason or the other then i suppose the most desireble thing to do is to contact the provider and see what options they can give you. it may mean that it will prolong the payments, but that’s much better than defaulting.

  • Eric November 5, 2012 at 10:51 pm

    They won’t go away and someone will come to collect on them eventually.i suppose the most desireble thing to do is to contact the provider and see what options they can give you. it may indeed indeed mean that it will prolong the fees, but that’s much better than defaulting.