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Defaulting on Student Loans – Just Do Not Do It

     For many Americans, student loans provide an invaluable path to higher education. Considerably more attractive than paying for school with unsecured debt (ahem… credit cards), student loans generally provide more reasonable rates and flexibility. If not paid back, however, they can cripple your credit and leave you in worse shape than that Modern Psychological Perspectives final.

     Should you default on a student loan, you are then obligated to immediately pay back the loan in full with no further opportunity to defer. If you are not able to pony up the cash (and why would you be, seeing as you just took out a loan and then defaulted on it?), any number of awful things can transpire. You could, for example, find your credit rating considerably damaged. This, of course, would make other areas of your life a whole lot more difficult; things like getting a car loan or finding a place to live (in areas where landlords check credit histories) suddenly become Herculean tasks.

     One of the worst things that can happen, though, is when your newly acquired lousy credit actually prevents you from landing the job you need to get the money to pay back that loan and restore your credit. Yes, that can really happen. A friend of mine – let us call her Sally – defaulted on a student loan after traveling out of the country for an extended period of time without arranging to make her student loan payments during those months. When she arrived home – penniless from her travels – she found that, despite being well qualified and interviewing well for three different jobs, she was unable to seal the deal on employment. Why? You guessed it. They checked her credit and did not like what they saw.

     It is not exactly the sort of thing you can make go away with a snap of the fingers, either. Consumer reporting agencies can continue to call on the information for seven years, which would keep you in hot water with APRs, landlords, and potential employers for a long, long time. Just to add insult to injury, defaulting could cost you an additional collection fee to a loan guarantee agency – plus the commission collection agencies charge to The Department of Education.


     If all that is not enough to scare you into submission, consider the fact that The IRS can intercept any tax refund you might be lucky enough to get, and The Department of Education and student loan guarantee agencies can swipe up to 15 percent of your wages if you default! You want more? Under the Debt Collections Improvements Act, the U.S. government can take a cut of any federal benefit payments in order to pay back federal debts, AND The Department of Education can actually sue borrowers who default on student loans!

     Your best options if you’ve already made the mistake of defaulting on a student loan are:

     a)    Repay or satisfy the loan in full,
     b)    Consolidate the loan via the FFEL Loan Consolidation Program or William D. Ford Direct Loan Program, or
     c)    Rehabilitate the loan through The U.S. Department of Education

     What is your very best option? Of course, it is to avoid defaulting on your student loans in the first place. Reputable issuers of student loans tend to be very lenient as long as you communicate any potential payment difficulties before you miss your due dates.


Josh Michaels is a freelance writer who survives on very little income and carefully considered financial decisions. This combination has allowed him to have fun, travel the world, and start a retirement account – all without the pleasure of holding a full-time job. He can be reached at: joshmichaelsmoney@hotmail.com.

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