Defaulting on Student Loans - The Consequences

Think long and hard before you skip out on your student debt

If you're considering defaulting on your student loans, allow the good people here at Wealthy Geek to give you some advice - don't!

The long-term consequences of sticking your head in the sand and ignoring your student loan payments far outweigh the short-term benefits. Defaulting on student debt can cause some serious damage to the health of your finances.

Before we discuss exactly why this is such a bad idea, let's take a moment to define what it means to be in arrears on your student loans. In the United States, if you have not made any payments on your debt for 270 consecutive days, you are considered to be in default. Once that happens, the Powers That Be are free to seek compensation from you and your pocketbook.

Here are some highlights of what they can do:

  • Your creditors can garnish your wages by as much as 15 percent of your take-home pay.
  • Your debt can be handed over to a collection agency, which is then free to use more aggressive tactics to get the money. Not only will you have to deal with harassing phone calls, but these agencies also can charge you for their costs of collecting your debt from you.
  • You may not be able to receive any state or federal income tax refund.
  • The fact that you have defaulted on your student loans will adversely affect your credit rating, which may put the kibosh on any plans you have for a mortgage, car loan, or credit card.
  • You may not be able to receive any more federal aid to go back to school until you have paid off your previous debt load in full.

To get yourself out of default, you are required to make 12 regular payments at the predetermined monthly rate. The good news is that once you do this, the record of your default will no longer be reported to the credit bureau.

Before you default on your student loans, make sure you have exhausted any and all options available to you, including deferring your payments or exploring different employment opportunities available for paying your debts down.

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