Should You Walk Away From Your Student Loans?
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(Photo: Eric Rogers)
It’s not surprising that you didn’t realize what you were getting into with your student loan. You were just barely out of your teen years when you signed the paperwork. If you’re like most people, you probably had little understanding of what it means to incur debt and were lulled into a false sense of security with the knowledge that payments will be deferred for years to come. The language can throw you too. What’s the difference between a subsidized and an unsubsidized loan? What about federal vs private loans?, and so on. This lack of understanding can make you the victim of predatory interest rates from private student loan providers. But walking away from your student loan isn’t the same thing as walking away from your home loans. You’d better be aware of the consequences before you decide not to pay.
Put simply, the only way to absolve yourself of your responsibility to pay back your student loan is to die, or to become unable to work due to a serious disability.
From the government’s perspective, defaulting on an obligation to pay back a student loan, which in the case of federal loans, is lent with taxpayers’ dollars is almost as serious as not paying your taxes. While it’s not a federal offense to fail to repay these loans, the government, and government-approved student loan companies have ways of getting money that is owed. That said, what can you do when the debt seems to be too much to bear?
Student Loan Consolidation and Refinance
Federal student loans are locked in based on current rates at the time of each disbursement. This can vary when the loan documents are signed. Private loans typically have a higher rate, and are usually tied to an index such as the Prime Rate or Treasury averages, much like a credit card. These are typically locked in at a fixed rate, and also vary depending on what federal rates are in place.
As a result of loans being disbursed each semester, many students will find themselves with multiple loans at multiple rates. For students wishing to consolidate their loans, they must apply for this with each lender. This will generally result in say, four loans, with varying interest rates, being consolidated into one amount with a common rate.
Refinancing typically means reduced monthly payments with a longer repayment period – usually at a lower interest rate. If you have federal student loans, and private loans, the interest rates will most likely vary greatly, and must be refinanced separately as you cannot combine your federal student loan debt with private student loans. To get the best rate with either type, make sure your credit is in good shape before applying. Your credit will be referenced, and will play a role in refinancing at a preferred rate.
Deferment
Deferring the repayment of loans is typically granted for a number of valid reasons. This postpones the repayment of principal for a specific period of time. This is typically for people who continue to be enrolled in school, disabled students that are undergoing some type of rehabilitation, or those individuals that have left school and are either unemployed, or able to display a marked financial hardship. For subsidized loans, no interest accrues during this time. For private loans, interest will accrue and will be recapitalized (added to the loan balance), thus increasing the size of the loan.
Forbearance
Those without an approved reason for deferment, but are still unable or unwilling to pay, they may be granted forbearance. During this period, payments can be postponed or reduced, but interest will continue to accrue. Interest is not subsidized during a forbearance, as it’s viewed as a voluntary postponement by the debtor. As a result you are responsible for the additional interest accrued while payments to the principal are not being made and it’s added to the loan balance. These are typically granted in twelve month intervals, but can be made in shorter ones such as three or six month intervals.
Alternate Payment Options
As with any debt, there are always options based on an individual’s specific circumstances. Federal lenders are typically easier to work with than private lenders, but there are always options. For the former the options include: extended repayment, graduated repayment, income sensitive repayment, income contingent repayment, and income-based repayment. For more information on these options it’s best to contact your lender and ask about what they can do for you. As with a deferment or forbearance, it is extremely important to contact your lender to discuss this option while your account is in good standing. Should you allow your account to go into default, many of the above options will cease to be available.
Declaring Bankruptcy?
Nope. In nearly every circumstance, student loans are non-dischargeable. Walking away from student loans is not like walking away from a credit card, mortgage or car loan.
So, What are the Consequences?
Collections
Like any substantial debt, the companies you borrowed from will hound you if you stop paying. Then your account will probably be sent to collections. They will call, send letters, and in many cases start contacting your family if you fail to respond to their attempts. If you were a minor when applying for your student loans and your parents co-signed for you, then they can start calling them as well and put pressure on them to make your payments. Additionally, if your account goes to a collections agency, you will be liable for any legal and court costs associated with collection attempts.
Lawsuits
This is more common with private lenders, but students that default on their student loans may be sued for the full amount of their debt owed. Courts will typically enforce this via wage garnishments.
Job Hunting
These days, many companies run a background and credit check during the application process. This is increasingly popular for positions that require even a modest level of responsibility, especially financial responsibility. While bad credit is not always enough to bar getting hired, having defaulted on student loans is typically a red flag. In short, it can communicate a lot to an employer about an applicants’ ethics and track record.
Default Interest Rates
If you neglect to pay your student loans, you will accrue penalties, fees and interest. Your account will eventually adjust to a default rate, and it will continue to accrue interest until action is taken. The process and rates for each type of loan varies. For more information visit the Federal Financial Aid website
Damaged Credit
Going thirty days past due on your student loans will have a negative impact on your credit. So, you can imagine that walking away from your student loans will carry far greater consequences. Most estimate the credit impact of defaulting on student loans to be similar to the hit for a real-estate foreclosure. While debtors’ prisons have not existed for over a century here in the US, defaulting can haunt you and your credit report for around a decade. To make matters worse, if you had a co-signer on your loans, their credit will be similarly affected, unless they make the payments for you. This, of course, could then put a huge strain on personal relationships.
Wage Garnishments
Here’s the biggest difference between other debts (mortgage, auto, and credit cards, for example) and student loan debt: if you fail to pay your student loans, your lender can garnish your wages. Many people move abroad as an attempt to avoid repaying their student loans. For those with an excess of $100k, this can make sense at first. If you move to the EU and find employment there, and pay taxes there, there is no way the US government can garnish these foreign-based earnings. The problem is, if you want to return to the US and work one day, you’ll return to the unsavory reality of a much higher balance – due to accrued fees, penalties and compounded interest – and very likely, a wage garnishment.
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41 Comments so far
leave a commentThe whole consolidation thing is a scam. If you consolidate your loans, you lock your interest rates. If you don’t, they continute to float. The rate is also discounted a couple points after a few years. Together, these have resulted in an interest rate around 2 percent for my wife’s loans. If we had consolidated, they would’ve gotten locked at some high rate long ago. The rates started around 8% and slowly went down to the current values. Her payment has similarly decreased by over 35% and we are now just 18 months from paying them off.
The whole student loan industry is a scam on the working class, brought to you by conservative politicians and the corrupting influence of big-business campaign money. A generation ago, students did not graduate owing tens of thousands of dollars. A good example was California’s free (FREE!) state college system, the envy of the world. Governor Reagan put an end to that because economically secure students spent too much time protesting against war and discrimination. Economically enslaved debt hostages don’t cause trouble, you see, and make a good money cow for well-connected businesses.
So the real answer to your loan problems is to THROW THE BUMS OUT.
Maybe not everyone has the benefit of having their parents be involved in their high school/college years, but I’m willing to bet most college kids with loans had their parents’ help acquiring said loans. If 18 year olds don’t understand what it means to take on a loan then perhaps their parents aren’t really preparing them for life in the real world. Most parents are co-signing those loans anyway, so it’s up to them to tell their kids what they are getting into unless they don’t mind paying for their kids for 10 more years. If a parent doesn’t think their kid will be able to pay back their loan when they get out of college then they probably shouldn’t send them in the first place. For those kids without parents helping you deal with college loans, how did you make it to college without your parents’ involvement in your education in the first place? I don’t get it!
how does this comment even help anyone? all you did was bash both sides of the coin the well to do and the poor kids with no parents. not everyone has a high horse to sit on jeff. lets not send kids to college so all the blacks and hispanics can keep doing all the cheap labor and support my college going ass… only the silver spoons can go to college i mean we are the only ones smart enough to deserve it. you are the reason why it can be difficult to live well in a america. its your fault alone. i hope your kids get caught up with loans and you have to bail them out. then maybe you will remember the stupid unforgivable comment you left for people to read.
I am a student that has no help from his parents who has taken out student loans. Its pretty simple to get into college when you’ve worked for it and you really want to go. Maybe parents aren’t always the helping hand, sometimes they’re the ones who aren’t in a position to lend support so I end up doing things on my own. Loans are a bad idea. I knew that going in, but sometimes there is no other choice. I knew that it was either I went to college on my own or spend the rest of my life asking, “Would you like fries with that?”
I don’t know the exact numbers, but there are plenty of kids in college who had little to no parental involvement. In my case my parents didn’t have the money, and never put pressure on e to go to college. So when the time came I was pretty much on my own. They never did the walk throughs, or parent’s night, or anything. I had to beg them just for the tax info, and then apply for their fafsa pin myself. Many people don’t realize this, but a big portion of today’s college students are going at it alone. And yes, we don’t really understand what we are signing into until its done.
Unfortunately, much of the college system has come to be operated as a grand scam to get our young into debt early and accustom them to staying there. The fact is that no other society in history needed everyone to have a college education to be gainfully employed. Just look at the textbook industry and all the multiple editions they produce to keep siphoning money from students seeking an education. Someone is scamming our young and nobody cares.
If we really wanted to train young people quickly and effectively, we would have a work-study system where students could gain on the job training and gain real world experiences rather than isolating themselves in an artificial, classroom environment for 17 years (13 for High school, 4 for college) where they cannot even gain the experience they need to really know what they need to study.
I completed two years of college and had about $1000 in outstanding loans when I decided to leave and train myself in a vocation. After working 6 years, I returned to college and finished with a degree in pure mathematics, totally debt free. Thank god I didn’t buy into the idiotic lie that you need to go to college straight out of high school and race to get a degree at the cost of going into debt. The people who push these lies on our youth ought to be billed every time a student defaults on their loan.
You can also move to another country for the rest of your life – as long as you don’t work in the country again, they can’t reach you.
I’m not sure what’s more saddening: banks and interest companies locking unsuspecting new students into a long-term loan w/no recourse of action regardless of what they got out of that education, or the fact that such a thing can effect your job search. I’m in default of my loan. The school I went to sucked (trade school) and didn’t give a crap about what the students got out of it (if anything) and now I have a bill for $20K w/an astronomical interest rate and can’t do anything with my education.
Hahaha…. America, land of the free….
I think the damaged credit here is a big problem. Not only will you not get a (decent) job – you won’t be able to get a loan to buy a car. Forget – a house. In this economy you need every break you can get.
Getting your wages garnished is not one of them.
There is such a thing as paid deferment, where the lending institution be it the federal government or a school itself will pay your loan for you as long as you are in a particular field such as education or health that meets their paid deferment program’s requirements. I got my wife’s perkins loans paid for the last 3 years because of her work as a medical technologist.
I was under the age of 18 when I signed my loans. Am I still responsible for them?
I would note that Sallie Mae in particular no longer allows for loan consolidation. If for example you have poor credit and finance some loans with a cosigner but others without, you will be caught with some low-interest loans (4%-ish) and some with a much higher interest (12% and up!). In the case of student loans however — in most cases a consolidation can be a good choice, but understand that the total cost of the loan as a rule /will/ increase in exchange for the convenience of having one payment date and one check to cut each month.
*cough* BULLSHIT *cough*
“you probably had little understanding of what it means to incur debt and were lulled into a false sense of security with the knowledge that payments will be deferred for years to come.”
If you didn’t understand BORROWING MONEY = DEBT, you shouldn’t have been going to school. Enough said. If I knew I could get a free ride to any collage, I would have done it, you all need to pay your money back because you signed the contract.
Leave the country after college. Collections, lawsuits, and wage garnishments can’t follow you into another country. Wait 7-10 years for the default to drop off your credit report. Then, you can decide if you want to move back home or not.
Not everything drops off your credit report after a year. Student loans is an exception, I believe.
Student loans are an instrument of the rich (bankers, etc) to keep the middle and lower class people from upward mobility as a result of college.
I agree with you. Student loans are not for the poor.
I think student loans very useful for those who need it. And with that loans we will be more motivated to study harder.
“For students wishing to consolidate their loans, they must apply for this with each lender.”
Inaccurate.
A student wishing to consolidate does NOT need to apply for the consolidation with each lender, they apply for the consolidation with ONE lender (i.e. the Federal Direct program), and then THAT lender contacts all of the respective lenders with whom the student already has loans.
Help I have $62,000 in Student Loans through the Parents Plus program. I’ve been paying them but recently have had a big reducation in my monthly income and can’t keep up with the $450 monthly payment. Do I pay the student loans instead of my mortgage. I’m 60 and keep up with this stress. Please help.
I work with many college graduates and college age students – we discuss repayment options, and ways to get them paid of sooner rather than later……
It is about life choices and living under your means not above them, as well as, owning up to your commitments – unlike most of the role models they have had.
This generation needs to change the way we do things and get back to good old fashion integrity while livng an exciting yet balanced life!
You should also let your readers know, that by defaulting on any federal loan, it becomes impossible to become an employee of the federal government.
If you are too stupid to understand what debt is at 18 years old, then you are NOT like most people and your parents should be slapped. They should have installed the value of a dollar in you a long time ago. Maybe because you were coddled and sheltered, you didn’t understand what debt is, but that doesn’t mean you don’t have to pay it. Quit wrecking the lives of others because you “didn’t understand” what debt was. For every dollar you don’t pay back, another social service is taken away from a person in need.
Yeah, ‘barely out of your teen years’… any kid smart enough to get into college is smart enough to understand a loan. When I ran out of money at school, I quit and worked until I had enough to go back. Now I’m debt free– I don’t feel bad for the idiots who lived off student loans and never tried to pay their own way.
Former students who default on their student loans are not only denied their college transcripts, they’re not even eligible for Job training programs UNTIL they’ve paid off their loans. This helps to keep millions of social workers gainfully employed because their clients CANNOT find decent jobs and are therefore trapped with nowhere to turn. This merciless catch 22 dooms thousands of Americans, like myself, to a marginal life, at best. The most recent job experience I had was working at Mcdonald’s over 6 months ago.
My husband is on SSI, ($1100 per month)almost half goes to rent, another $100 for his meds ( he’s diabetic- and I’m type 2): we’re supposed to get by on $102 Foodstamp/Card assistance.
How am I supposed to pay my debts if I can’t find work?
Very informative, thanks for posting.
i had to leave grad school b/c of my recurrent major depression. i haven’t been able to hold a job. haven’t been able to afford to go to a therapist b/c i don’t have medical insurance nor money. since i don’t have med insurance, i can’t get help, nor can i get a job nor pay my loans back. i tried working last summer… but i broke down in the middle of the job…talk about hitting a major low. it was so embarrassing. so i’m afraid of getting another job until i can get help and feel a bit stronger and more stable. once again…i can’t get help unless i have money…don’t have money b/c i can’t work…it’s an ongoing cycle.
i didn’t tell sallie mae that i have major depression b/c i don’t think it’s their business. it’s embarrassing enough as it is to talk about. they’ve harrassed me and called and called for over a year now. now they sent me to collections. i’m beyond screwed and probably have no chance of getting another loan to continue school again. i hate this!! it’s not fair that these loan companies think that i want to avoid paying. are they stupid? why the hell would i take out money if i wasn’t planning on paying it back! we’re in a recession and the only jobs that are available are crap! like i said i worked a job last summer….it was at a local craft store for God’s sake. i have so much medical experience and couldn’t find a job in the field.
my advice to everyone is not to take out loans. fuck it. if you can’t afford school then don’t go. you don’t want to get in over your head with bills. i’m pretty much screwed for life now. there’s no way out of this mess.
I agree.
In hindsight, if you can’t pay for school without loans and won’t get a good job from it, what good was the degree, anyway? It’s time for the Universities to feel the pinch when people quit going. Then maybe the people in the US Senate will do something for the students that is more than a temporary fix to make a name for themselves.
One should NEVER walk away from student loans. It’s called a loan, not a grant or a gift. There’s ways to fix it such as a loan consolidation, refinancing, or use a grant to pay for it. Last resort: file for bankruptcy.
A really bad idea. Student loans are generally not dischargeable in bankruptcy, will ruin your credit and haunt you forever.
Just wanted to share a great Department of Ed resource with all of you…the National Student Loan Database (NSLDS). If you have federal student loans, all records of them including history and other details are availble at http://www.nslds.ed.gov. You’ll need your PIN from filling out the FAFSA, but you can always have a new one issued. Sometimes a little bit of organization can help you get a handle on all your loans, especially if you attended different schools or had different lenders/servicers.
Nice post.
I grew up in a military family, father called it quits with the family when I was 13 and ended up spending my high school years in the projects of a major city.
I had the opportunity to be the first in my family to go to college and took the loans. Boy oh boy, if I knew then what I know now. Yup, had no clue as to the value of a dollar, never had any, and I’m paying for it now.
I make a very good living, yet my loan payment is slightly over 10 percent of my income. Basically my freedom to change jobs is limited and I cannot change careers.
As some folks have indicated, loan consolidation is a scam, avoid doing it. I’m locked in at 8.25% because of it. Yeah, OMG.
Personally I think that school loan debt is every bit of a problem to our nation’s econonmy as social security or medicare. It’s a terrible way to fund education and it effects all of us.
For college hopefuls. If you must take loans in order to get an education you better be pretty damn sure you know what you want to do. Get your degree in 4 years or less! As one or two posters have said: You do not need to go to college immediately after high school.
Consider 2 year programs. I’m a software developer and have worked coast to coast for companies such as Microsoft, IBM, and Rockwell, and my liberal arts education has never helped me get a job. My technical knowledge and experience did. Yes some companies really want to see a 4 year degree on the resume but not as many as you’d think. Experience is much more important.
Do not simply stop making your loan payments. It is much better to contact the lender and get a forbearance or deferment.
government is the biggest crooks. They will steal from their own mother and children to make sure they get their unearned salaries and raises. The great american politics. Disgusting.
I don’t know which is scarier – the author, or these pathetic comments.
The way you’re acting, you should walk away from your loans because you time in school was obviously completely wasted.
I basically agree with what you wrote but it is totally ridiculous when people mention this credit check thing when getting a job. That does not happen to you if you actually went to a good college and have learned your basic rights, freedoms and guarantees associated with being educated. In short, what I mean is if you are dumb enough (even with good credit) to allow an employer to do a credit check on you, then you are in fact dumb enough for that employer to pay you less than you are worth. That is a practice that almost never happens and the one time it does you can easily (even in this economy) say no eff’in way and they will understand. Unless you live in a terrible place, and by that I mean anywhere that is not on the east or west coast, and then in that case, maybe your job possibilities are more limited and employers will attempt more bs. All I am saying, I hate it when you a-holes at the credit company try to propagate more of that bs then you know you have to stand on. This is an industry that is doing so much evil that they are actually being restructured by the government, which is by the way an even more evil industry. It as if the government said, “wow, that is amazingly evil, we arn’t even that evil, lets stop these guys before they take our jobs at being evil.” So what I am saying stfu with your “they can check your credit score thing” it is bs and you know it, so stop trying to bs young people to excepting a new status-quo that only meets your interests.
The title of this post is misleading, since you can’t “walk away” from student loans. I’m also a little shocked lately by people acting like they had no idea that they would have to repay their student loans. That’s why it’s called a LOAN.
I’m still paying mine and will be for the next 30 years. But I agreed to it, because it was a trade-off to be able to get an education even though I didn’t have family to help me pay for it.
America the great is in a sorry state of disrepair. Student loans are a FORM OF SLAVERY. The public has been brain washed into thinking that if they don’t attend college, you will not be successful. Student loans in them selves are a form of hardship and only upon death the debtor will be able to get rid of this debt. It is amazing to realized that the US government is more up to forgiving a foreign debt than to forget one of it’s citizens student loans. European countries such as Germany, provide free university and college to it’s citizens. The problem with student loans is an muted echo to health care issues affecting the US today. Debt by means of student loans and high health cost is in it self destroying the very fabric in which this great country was founded on. The fact that no one has even realized is that their right to privacy and constitutional rights has and will continued to be violated by this companies. Continual harassments, treats and intimidation are unfortunate reminders that we have been lied to. One never ops not to pay your debt because you want to, you don’t pay because you just plain can’t. What ever happen to liberty and justice for all? Peace of mind is something debtors don’t EVER have. I wounder how many people have killed themselves because of this issue and their death have been forgotten in mounts of government paper work. Liberty and justice to us all?
Consolidation loans aren’t always a bad deal. I consolidated a few years ago and locked my rate at 4.75. Interest rates have gone up since then, so it worked for me. I did the “go to community college because it’s cheaper” route for 10 years while I worked full time, started a family, etc. If I hadn’t taken out student loans, I couldn’t have finished the undergraduate degree. Once I signed those papers, there was no way I WASN’T going to finish. No, the degree didn’t give me a dream job making a fortune, but it has improved my income and given me more opportunities, which is all I expected a degree to do. Yes, I will be paying for that degree for the next ten years. That’s what I signed up for, that’s what I got. That’s why it’s called a loan and not a gift.