If you fail to pay your student loan, you probably won’t find a team of armed U.S. marshals at your front entrance, as just one Texas man did lately. Nonetheless, it’s still a very bad idea to dismiss this debt.
In most respects, defaulting on a student loan has precisely the very same consequences as failing to pay off a credit card. But in one key respect, it can be a lot worse. It probably will not be as bad as armed marshals at your own door, but it could get very unpleasant.
Here’s what happens:
If your loan is 90 days overdue, it’s officially”delinquent.” That simple fact is reported to each of three major credit bureaus. Your credit score will be hit.
This means that any new applications for credit might be denied, or awarded just at the higher interest rates offered to borrowers that are insecure. A bad credit rating can accompany you in other ways. Potential employers frequently check the credit ratings of applicants and use it as a measure of your personality. Thus do cell phone service providers, who may deny you the service contract you want. Utility companies may require a security deposit from customers they do not consider creditworthy. A prospective landlord might deny your application, also.
Next, You’re ‘In Default’ :
If your payment is 270 days late, it is officially”in default” The financial establishment you owe the money to, identifies the problem to a collection agency. The agency is going to do its best to make you pay up, short of activities that are banned by the Fair Debt Collection Practices Act. Debt collectors may also tack on fees to cover the expense of collecting the cash.
It may be years in the future before the federal government gets involved, but when it does, its powers are considerable. It can grab your tax refund, and apply it to your outstanding debt. It may “garnish” your paycheck, meaning it’s going to contact your employer and arrange for some of your salary to be shipped directly to the authorities.
Everything You Could Do :
These dire consequences can be prevented, but you want to act before your loan is in default. Several federal programs are intended to assist, and they are open to those who have federal student loans, such as Stafford or Grad Plus loans, although maybe not to parents who borrowed for their children.
The government may even contribute part of their interest on the loan and will forgive any remaining debt once you make your payments over a span of years.
This last attribute, incidentally, is the origin of this nickname”Obama Student Loan Forgiveness Program.” The balance is indeed forgiven, but only after 20 to 25 years of payments. And the obligations might be decreased to zero, but only if the indebted person has an extremely low income.
The Public Service Loan Forgiveness Program is designed especially for men and women that work in public service tasks, either to the government or for a nonprofit organization. Individuals who engage may be eligible for federal debt forgiveness after 10 years on the job and 10 years of payments.
Details of those federal programs are available online, as is information about eligibility.
It is important to keep in mind that none of those programs are available to people whose student loans have gone into default.
A fantastic first step is to contact your creditor as soon as you realize that you may have difficulty keeping up with your obligations. They could have the ability to work with you on a more doable repayment program or steer you toward one of the federal programs.
The Flip Side :
If you maintain your payments, then it will enhance your credit score. According to Experian, customers with student loan debt generally have a higher credit score compared to those who are student-debt free. That good credit history can be crucial to a young adult going for an initial auto loan or a mortgage.
Worst-case Scenario
There was a guy who found himself with armed forces U.S. marshals on his doorstep. He borrowed the cash 29 years ago and failed to repay the loan. The government finally sued. According to the U.S. Marshals Service, several attempts to serve him with a court order failed. Contacted by phone back in 2012, he refused to appear at court. When the marshals finally confronted him outside his home, he told CNN, ” I went indoors to get my gun since I didn’t understand who these guys were.”
And that’s the way you end up facing an armed posse of U.S. marshals, together with local authorities as backup, for failure to pay a student loan of $1,500. (For the record, the guy says that he believed he’d paid the debt, didn’t know about the arrest warrant and doesn’t recall the phone call.)
But even this sorry story includes a pretty happy ending. Hauled into court at last, the guy agreed to pay off his ancient student loan, and accrued interest, at the rate of $200 a month. After 29 decades of curiosity, the $1,500 debt had grown to approximately $5,700.
Bottom Line
The government and the banks have a superb reason for working with people who are having trouble paying off their student loans. Student loan debt has reached an all-time large, with an estimated 40 million people today owing an average balance of $29,000, according to the credit company Experian. You may be certain the banks and the authorities are as anxious for the money as you’re about repaying it.
Just be sure to alert them the moment you see possible trouble ahead. Ignoring the problem will only make it worse.