What Happens When You Default on Your Student Loans?
As the economy tanks and employment skyrockets, the number of former students struggling to pay off their student loans is likely to grow, too. While failure to repay any debt can have serious consequences, not making payments on your student loan is especially grave. Here’s a quick primer on what it means to default on student loans — and how to avoid it.
What does “being in default” mean?
If you are more than 270 days delinquent on your loan repayments (and have not arranged for deferment or forbearance), then you are considered to be in default. Three out of four people in default dropped out of school. I guess they didn’t know that even if you never graduated from school, you must still pay back your loans!
These babies are with you for life — or at least for the life of the loan repayment terms. In fact, your federal student loans are one of the only forms of debt that cannot be discharged in a claim of bankruptcy.
What happens to me if I go into default on my student loans?
• Your credit rating will be trashed for at least seven years. Forget about borrowing money for a car, a home, or even a new furnace. If you are so “lucky” to get a loan or a credit card, it will come with sky-high interest rate (think 40% or higher).
• You may get turned down for jobs you apply for and apartments you want to rent. That’s because potential employers and rental agencies are legally entitled to your credit report. And once they see that you are in default they may well pass on you.
• Collection agencies will hound you. They will call your place of work, your home, your parents, and other family members. They will harass you and threaten you and generally make your life a waking nightmare.
• The government will garner to your take-home pay and intercept your tax returns and stimulus checks. The government WILL get back its money, even if you were counting on that refund check to feed yourself or pay your rent.
• You will be held responsible for court fees and any other expenses associated with collecting your student loan repayments. Imagine, you will be responsible for paying the salaries of the collection agents that hounded you.
I told you defaulting was serious business. It is scary to be in a situation where you might go into default, but trust me, it is even scarier to actually be in default.
If you are facing the impending reality of not being able to pay back your student loans, the first thing to do is to call your lender and ask for help. You might qualify for deferral or hardship forbearance. Even if you are not a candidate, you may be able to renegotiate your loan repayment terms through consolidation.
Before you get to that point, though, it’s important to take prudent precautions so you don’t ever find yourself in this situation. Check out this post from last April with 10 tips to prevent defaulting on your student loans.