Kelli Space, the author of this post, is a 2009 graduate of Northeastern University and a student loan advocate. She created the site twohundredthou.com to solicit help with her hefty monthly payments. You can follow her on Twitter at @twohundredthou.
The one solid piece of financial advice that I’ve received for the past six years has been to not default on my student loans. It sounded bad, and I knew I had to avoid it at all costs. A few years ago, though, I finally decided to dig a little deeper into the mystery of “default”: sure, it was the result of missing payments and not adhering to the terms laid out in the original agreement or promissory note. But then what?
It turns out that one of the major effects of student loan default is that your credit will likely take a nosedive. Credit is important as, when damaged, it may result in the inability to take out a mortgage, open a credit card, or take on other personal loans (oh great, more debt!). Poor credit might make you an undesirable candidate to even rent an apartment, or lease a car; you can imagine a landlord wouldn’t be confident in your ability to pay rent on time. While these may or may not be things you’re considering right now, you don’t want to limit your possibilities for the future!
Aside from bad credit, defaulting on a loan might cause your lender to garnish your wages directly from your paycheck. Lenders can also intercept your federal tax refund if applicable. Even your lottery winnings can be withheld! You finally catch that big break, but your student loan debt creeps up behind you…
Worse, you could get sued — by both federal and private lenders. Apparently there is also no time limit on student loan default lawsuits, according to NOLO, and “you can be sued indefinitely.” Lenders can also turn defaulted loans over to collection agencies who have been notorious for harassment, and will undoubtedly tack on collection costs to the amount of your loans.
I’m stressed out just thinking about this.
But there is help. To avoid these burdening consequences, you have a few options before you default. You can discuss forbearance with your lender, whereby the two parties come to an agreement to lower payment for a mutually agreeable period of time. Perhaps you can pay half of what your current monthly payment is; you might have 2 years of eligibility to be able to forbear your loan payments.
You also have the option to defer your loans for a period of time, which essentially means to suspend your payments.
The option to declare bankruptcy is also there for those who can prove extreme undue hardship in direct relation to their student loans. I’ve read that less than 1% of all cases are discharged, but there are a few “undue hardship” examples listed here for reference. Bankruptcy is always a last resort, as it, too, will ruin your credit for upwards of a decade, but it is understood that for some it is necessary and the only feasible option.
There are also tons of resources online to help get you in the spirit of earning more, spending less, and putting more money toward your debt each month. Some of these resources are quite powerful, and the online personal finance community — particularly the get-out-of-debt crowd — is a positive group of people anxious to help you cross the finish line. You can check out Wise Bread’s list of top personal finance blogs here. And don’t forget to sign up with ReadyForZero to help rid yourself of any other debt, as well.
This article is part of our Student Loan Debt Resource Center. If you’re looking for additional information about student loans, be sure to pay a visit!
Image credit: Kaplan International Colleges