What You need to know about Defaulting on your Student Loans
If you have to pick a loan to default on, most financial advisers are in agreement that it should never be your student loans. While American consumers are protected to some extent against getting in over their heads on credit cards, car loans, and even mortgages, there are no such protections on student loans. Defaulting on a student loan is one of the quickest ways to ruin your finances for life.
The problem is that unlike most other types of loans, student loans cannot be discharged during a bankruptcy. That means that no matter what happens in your life, you cannot escape paying your student loans. People with serious health problems or who are out of work for extended periods have discovered too late that they still have to pay their student loans.
If they absolutely cannot pay their loans, they are still on the hook. Collection agencies and banks are allowed to collect the payments that they are owed for student loans in a variety of ways. The most common method is to obtain a judgement in a court that allows them to garnish up to 15% of a person’s paycheck. That money comes out of each check and goes directly to the bank. In the case of federally backed student loans, the government is also allowed to garnish 100% of your income tax refund and up to 15% of your Social Security, cash assistance, and any other type of check form the government.
Of course, the banks will charge you a huge fee for taking your money from your paycheck. There are no laws controlling how much a bank is allowed to charge in fees on a student loan, so it’s not uncommon for a modest loan amount to double or triple due to fees. That can cause a person who has defaulted on their student loan debt to pay for decades on their debt. In fact, hundreds of people in the United States die every year still owing money on their student loans. In these cases, the bank is allowed to garnish the estate of the deceased before their heirs are given any money.
<p data-sp-element=”content”>If you’re struggling with student loan debt, you have to take steps to get out from under this burden. Consolidating your loans is one way to pay off your lenders and get a fresh start on your debt.