If you weren't aware of the popular (and controversial) story surrounding the man that was arrested after defaulting on his student loans, check this out:
Basically the guy defaulted on his student loans 20+ years ago, ignored a court order that he said he wasn't aware of, and was arrested and brought to court. It ended up that he had to agree to a settlement to pay back his $1,500 ($5,700 after interest for almost 30 years).
I think this goes without saying that this is probably not the best way to handle your student loans. 🙂
I'll be the first to admit that I'm not a fan of defaulting on student loans in any way. I was PISSED when the New York Times came out with an op-ed that basically glorified using the strategy of default to walk away from student loan debt.
Defaulting is a horrific financial decision. Your credit gets trashed, your wages can be garnished, and your ability to be employed could be seriously diminished.
If you didn't read the news article, the most striking sentence was: “[U.S. Marshals] have to serve anywhere from 1200 to 1500 warrants to people who have failed to pay their federal student loans.”
Wow. Better start making some freaking payments right? This will be an interesting story to watch as more information comes out. Either way, there are MUCH better options out there than default!
So what other options do you have if you considering defaulting on your student loans?
Easily my favorite long term option for people who are looking to save money on their student loans!
There are a lot of good companies out there that handle this type of loan (SoFi, Citizens Bank, Earnest, and Darien Rowayton bank to name a few). If you are in a position to refinance, don't just look for the lowest payment option. Stay with me here.
Try to make BIGGER payments than your required minimum (sounds crazy, I know) and fully maximize the lower interest rate you can get through refinancing. You will save thousands of dollars over the life of your loans by refinancing at a lower rate.
The federal government allows borrowers to wrap all of their loans into a single monthly payment at no charge. In some cases they will lower the monthly payment, but it comes at a steep price. Your loan terms can be stretched up to 30 years. Sounds cool right?? Nope. Extending your terms can cost you thousands more in interest charges than a typical refinance.
This is a VERY temporary solution if you are facing default that allows you to delay your principal and interest payments. You need to apply with your loan provider and may not be granted a deferment.
Interest may or may not continue to accrue during a deferment (the government may actually pick up the interest tab in some circumstances).
Surprise! Forbearance and Deferment aren't the same thing. 🙂
By applying for forebearance, you are essentially delaying your loan payments for a year. This is really designed for people who are going through serious financial hardship or illness. The problem? Interest continues to accrue and your loans get bigger over those 12 months.
5) Income based repayment
Income based repayment seems a little like the kiss of death to me IF you follow the payment plan that the government suggests. With this option, you pay either 10% or 20% of your income for 20-25 years.
The issue I have with income based repayment is that the payments may be so small that they don't even cover the interest charges, which means a perpetual expansion of the total amount of your student loans.
I know 4 out of the 5 options above don't seem great, but ANYTHING is better than defaulting on your loans. You aren't protesting the government when you stop paying, or making some kind of epic statement for all student loan borrowers. You're just screwing yourself.