4 Important Facts about Defaulting on Student Loans

Young people may think defaulting on student loans is not a problem that will affect them in the future. However, any loan default will have a significant impact on your financial stability for years to come. Your early adult years serve as the basis for credit scores that will be used for your first car loans and home loans. Having good credit as a young person is essential to building for retirement years down the line.

1 - Government Loan Defaults Prevent Future Borrowing

If you have federal or state student loans, defaulting may make you ineligible for future loans with a government organization. For example, if you plan on going to graduate school, you will not be able to receive a student loan from the government. The same goes for government guarantees on housing and business loans. If you want to capitalize on these benefits in the future, then you should not default on a government loan in the present. In most cases, a single default on one of these loans means you cannot use the government's options for financial aid ever again.

2 - You May Face Legal Proceedings

A default does not simply go away. Many people think they can accept the consequences of default, like a lower credit score, and then wipe themselves clean of the debt. This is only true if you declare bankruptcy, and even then there are legal consequences. You signed a legally binding loan document that promises you will repay the loan. If you default, the organization that provided the loan may sue you to recover the loss. Any asset you placed as collateral may be seized, and your wages may be garnished to help pay the loan.

3 - Credit is Not Easily Repaired

Even once you settle the default issue, you will have a long road ahead to repair your credit. Surprisingly, it takes very few negative reports to damage your credit, while it takes years of positive actions to rebuild your credit once it is damaged. This means you will pay for your default in higher interest rates for up to ten years after the default hits your credit score. If you are graduating in your early twenties, think about all of the loans you will want to take into your early thirties. Business loans, home loans, car loans and personal loans will all be more expensive to you, if you can even access them, because of a decision you made to default today.

4 - There Are Other Options

In nearly every case, default is a decision. There are many options to try before you allow a loan to move to default. You may attempt to negotiate the debt with your lender. The federal government in particular is very good with loan forgiveness and deferral. Even private lenders will work with you to delay payments on a limited basis. You may also consider settlement, refinancing or consolidation. All of these options are default alternatives. While they each have drawbacks, they are ultimately better than not repaying a loan.


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