The Risks of Defaulting on Federal Student Loans

It’s crucial to understand the consequences of defaulting on federal student loans. Contrary to popular belief that one might have some room for maneuver, defaulting on these loans can lead to severe financial repercussions. In this article, we explore the circumstances in which it makes no sense to default on federal student loans and the myriad risks associated with such actions.

Always Pay Back Your Federal Student Loans

The cardinal rule when it comes to federal student loans is always to pay them back. If you made a commitment to taking out these loans, you need to honor that commitment. Even if you are financially challenged, setting up a payment schedule and making at least a minimal payment can significantly impact your situation.

It is also important to note that federal student loans are not dischargeable during bankruptcy. Even if a judgement is filed against you, you will still be required to make a small payment. Attempting to default on these loans is a desperate solution that is never advisable.

Income-Contingent Repayment Plans

For those who cannot immediately meet their loan obligations, availing oneself of an income-contingent repayment plan can be a viable option. This allows borrowers to pay back the loan based on their income, potentially forgiving the remainder of the loan after 10 years of steady payments. However, it requires diligent communication with the lender to maintain accurate financial information.

Default - A Last Resort

Defaulting on a federally provided student loan is a last resort. When you default, the lender may eventually garnish your wages, meaning a portion of your salary will be used to pay back the loan. Additionally, you will end up paying everything you borrowed, plus interest. This is a costly and procedurally complex option that should only be considered in extreme cases.

Private Student Loans and Bankruptcy

Private student loans have different rules compared to federal loans. However, even if you declare personal bankruptcy, the private lender may still be able to recover the amount you owe. Therefore, it’s essential to be fully informed about the terms and conditions of your private student loans before accepting them.

The Consequences of Default

Defaulting on federal student loans can lead to several severe consequences that can impact your life in numerous ways:

Garnished wages: A portion of your salary can be directly withheld to pay off the loan. Garnished tax returns: Your tax refunds can be used to pay back the loan. Destroyed credit score: Defaulting can cause significant damage to your credit score, making it difficult to obtain loans or credit in the future. Unable to rent a home or apartment: If your credit score is poor, landlords may be hesitant to rent to you. Inability to get a mortgage: You may face higher interest rates or be denied a mortgage altogether. Higher interest rates on existing credit cards: Your credit score can impact the interest rates on your credit cards. Inability to obtain new credit cards or bank loans: Lenders may be reticent to offer you credit without a good credit score. Unable to buy a new/used car on credit or higher interest rates: Your credit score can also affect your ability to purchase a vehicle on credit. Unable to work a government job: Certain government positions may require a good credit score.

Ultimately, the federal student loans were a commitment you made, and it is your responsibility to honor that commitment. Not paying back these loans means you are not responsible towards the financial agreement you made, and this can lead to a range of negative outcomes.

Remember, the money you borrowed was meant to be used for your education, and repaying it is a way of showing that you value that investment in yourself. Leaving this debt unpaid ultimately results in more financial strain and can restrict your future opportunities.

So, while there may be no situation that justifies defaulting, understanding the risks and working towards a manageable payment plan can be the better route. It’s always advisable to consult with student loan professionals or your servicer to explore all your options and find a solution that works for you.