Conventional wisdom says defaulting on student loans is to be avoided at all costs. But could student loan default help borrowers?
Some people seem to think so. Although their numbers are likely small, some borrowers intentionally default on their student loans to protest the student debt crisis or to wipe away their debt through bankruptcy.
But the consequences of default are pretty severe, so it’s crucial to understand what happens before choosing this risky route.
Here’s what you need to know about those protesting the college financial crisis through student loan default — and how it could seriously backfire on your finances.
Can student loan default help more than it harms?
Defaulting on student loans for bankruptcy discharge or a settlement
Why is defaulting on student debt a problem?
Struggling to pay? Consider these strategies
The student loan crisis is worse than ever: about 45 million Americans owe $1.56 trillion in student loans. According to Forbes, 1 million people default on their federal student loans each year, while the Brookings Institution estimates that about 38% of borrowers who entered college in the 2003-04 school year will default on their loans by 2023.
Federal student loans are considered delinquent after one missed payment and in default after 270 days of missed payments. Private lender rules vary, but most consider your loans to be in default much sooner. CommonBond, for example, considers loans to be in default after three months of missed payments.
The majority of borrowers who fall behind likely do so due to financial hardship, combined with a lack of knowledge about managing their debt. But some borrowers intentionally default to protest the student loan industry.
Author Lee Siegel wrote about his own student loan default in a New York Times op-ed in 2015, where he also suggested mass default could be used to change the current system of lending and higher education.
“The collection agencies retained by the Department of Education would be exposed as the greedy vultures that they are,” Siegel wrote. “The government would get out of the loan-making and the loan-enforcement business. Congress might even explore a special, universal education tax that would make higher education affordable.”
In the eyes of Siegel and those who have followed in his footsteps, millions of Americans have been victim of an immoral system, one that could be overturned by mass default. Some student loan activists even go so far as to call the current system of student lending “economic terrorism.”
But while intentional default is sure to be disruptive, it’s unclear how feasible this strategy would be for most Americans — especially since their finances could be destroyed in the process.
Besides student loan protesters, some borrowers default on their loans in an attempt to wipe away their debt through bankruptcy or reach a settlement with a debt collector. Although discharging student debt through bankruptcy is difficult, it’s not impossible.
In the case of severe financial hardship, you might be able to get rid of your debt through Chapter 7 or Chapter 13 bankruptcy. But achieving student loan discharge this way is rare, and the involved legal fees could get expensive.
Plus, defaulted student loans could get more costly over time, as interest will continue to add up without monthly payments. So if your bankruptcy claim is denied, you could end up in a worse situation than where you started.
In terms of reaching a settlement, some private lenders or debt collectors might work with you to reach a settlement if you default. If you have private student loans, a collector might agree to a lesser sum to get you to pay.
Plus, private lenders only have a certain number of years to take legal action. Once the statute of limitations is up, your lender has no legal recourse to collect.
Defaulting on private student loans can be a strategic way to negotiate a lesser settlement, but it will likely involve some visits to court, and a positive outcome isn’t guaranteed. Unless you have exceptional circumstances, you might be better off pursuing alternate strategies for student loan discharge, forgiveness or repayment assistance.
Regardless of how you feel about the cost of college or the student loan industry, defaulting on your loans could lead to a host of bad consequences. As mentioned, private lenders can take you to court and demand full and immediate repayment.
And the federal government has wide-reaching powers to collect, including:
- Garnishment of your wages, tax refund and Social Security benefits
- Loss of eligibility for deferment, forbearance and other repayment plans
- Loss of eligibility for future federal financial aid
- Demand for immediate repayment of your balance and interest
- Preventing you from buying or selling real estate
- Taking you to court and charging you for any costs that come with the collection process
Along with the other consequences, your credit will be completely destroyed. Your lender will report missed payments to the credit bureaus, and your credit will take a swan dive for seven years.
If you have a cosigner on any of your defaulted loans, their credit could take a hit as well. Poor credit could make life difficult for you and your cosigners, not to mention strain family relationships.
So if you’re considering defaulting on student loans on purpose, make sure you fully understand the harm it could cause to you, as well as anyone else on the hook for your debt.
The majority of borrowers who default on their debt probably aren’t doing so on purpose. Instead, they can’t keep up with steep monthly payments while paying their other bills. If you’ve already defaulted, explore your options for loan rehabilitation or consolidation.
If your loans are still in good standing but you’re struggling to pay, look into alternative strategies for managing your debt before you miss a payment. With federal student loans, for example, you can explore repayment plans such as:
- Income-driven repayment plans, including income-based repayment and Pay As You Earn. These plans adjust your monthly payment to 10%, 15% or 20% of your discretionary income.
- Extended repayment, which lowers monthly payments because it extends your terms to 25 years.
- Graduated repayment, which lowers monthly payments and increases them throughout a 10-year term.
- Deferment or forbearance, which postpone payments if you go back to school, run into financial hardship or have another qualifying reason.
By lowering your monthly payments — or pausing them altogether — you can get some financial relief without going into default and hurting your credit.
Unfortunately, private lenders aren’t so flexible, but some let you pause payments through deferment or forbearance in certain circumstances. Whether your lender advertises this benefit, reach out to your loan servicer to see if it can help you before you default.
A final option for private and federal student loans is student loan refinancing. When you refinance, you might get a lower interest rate, saving you money. Plus, you can choose new terms with an adjusted monthly payment.
But only borrowers with strong credit (or a creditworthy cosigner) will qualify, so refinancing isn’t a solution for everyone. Plus, refinancing federal loans means you lose access to federal protections, which might be a sacrifice you’re not ready to make.
Whatever you choose, learning about your repayment options will help you manage your debt in a way that works for your situation. Even though your loans might feel burdensome, you can find a strategy that works for you without creating even more headaches by going into default.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.47% APR (with Auto Pay) to 7.59% APR (with Auto Pay). Variable rate loan rates range from 2.27% APR (with Auto Pay) to 6.89% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of August 15, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/15/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.37% effective July 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.27% – 6.89%1||Undergrad & Graduate|
|2.27% – 7.55%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.24% – 6.67%4||Undergrad & Graduate|
|2.37% – 7.95%5||Undergrad & Graduate|
|2.46% – 9.24%6||Undergrad & Graduate|