April 23, 2020
This post is for college students past and present who are carrying student loans. Hopefully, most of you have been faithful in making your monthly payments and keeping your accounts up to date.
However, some of you may have missed a payment or two for whatever reason or may be debating the value of making your regular, agreed-upon payments. Missing that first payment can sometimes be the little hole in the dam that eventually leads to a collapse of making any payments at all.
As my title notes, I'm referring to loan delinquency (being late with payments) and loan default (failing to pay anything at all). I realize that you may already have been briefed on the conditions of your student loans, but it may have been so long ago that you've forgotten the terms to which you agreed. Also, maybe you never paid that much attention, or any at all, to what those terms are. If so, it's time for a refresher.
There are consequences for treating your loans as a low priority. I thought that the best way to update your awareness would be to go directly to the source of knowledge regarding mishandling your indebtedness: The Federal government. One of the best explanations about these matters appears on the Federal Student Aid site's Understanding Delinquency and Default page.
Here, at the very top, you'll find the unadorned bottom line:
Those two sentences may seem to be emphasizing the obvious, but some borrowers, probably more than you imagine, have ignored and are ignoring making their payments. Maybe these late-payers and non-payers are holding out hope for a mass forgiveness of their debt. While there are government programs in place (and proposed) to ease the burden of debt, such as those put in place by Presidents Obama and Trump, the simple fact remains: You borrowed money that must -- somehow -- be repaid.
I had students loans that I repaid over a decade. That seemed like an eternity to me because during those ten years I faced a number of economic ups and downs (mostly downs) that many times made writing my loan payment checks a very difficult task.
Thinking back, I recall that most of those years of repayment were during the early period of my marriage, when we were just starting to raise a family and my job security was anything but secure. Yes, there were times that I considered skipping a payment or two, but I never did. I was always somehow able to make those payments, although during the difficult times, figuring out how to manage all the other bills became more difficult than doing well on the SAT.
I never considered just giving up on making my loan payments. That would have ruined many nights of sleep for me. One of the advantages of being an obsessive personality, as I am, is wanting to avoid loose ends. Allowing loan payments to drift into obscurity would have been creating a giant set of open loops and I couldn't imagine letting that happen. I'm glad that I didn't.
Accordingly, let's take a look at some of the key facts, not myths, surrounding student loan delinquency and default. The government gives us a very clear, somewhat dramatic, fact at the top of the loan information page:
If you don't make your loan payments, and your loan is delinquent, you risk going into default. Defaulting on your loan has serious consequences.
The key word in that sentence is consequences. It's a huge mistake to think, “Maybe nobody will notice that I'm late with my payment(s)." Think again. Here are some additional facts about being late with payments, a.k.a. being delinquent:
… Your loan becomes delinquent the first day after you miss a payment. Even if you miss just one monthly payment and then start making payments again, your loan account will remain delinquent until you repay the past due amount or make other arrangements, such as deferment or forbearance, or changing repayment plans.
If you are more than 90 days delinquent on your student loan payment, your loan servicer will report the delinquency to the three major national credit bureaus. This will lower your credit score and negatively affect your finances....
I'm sure that not every student loan holder understands the consequence of a lowered credit score (or credit “rating"). I've purchased many “big-ticket" items “on time," allowing me to make payments as I go. What has allowed me to do this is my excellent credit score, which has been built by decades of paying my bills on time. It has been difficult to do this at times, but has paid significant dividends.
Thus, if you're behind in your student loan payments, your credit score may be so low that you won't be able to buy that house, car, refrigerator, TV, stereo, furniture, or get that credit card, cell phone plan, or even some kinds of insurance that you desperately need. Consequences.
Now, going one giant step beyond delinquency, let's take a look at default. Default occurs when your delinquent payments remain delinquent or you simply stop making payments altogether. Being late with a payment can be like eating just one potato chip. You may feel the overwhelming urge to reach into the bag, so to speak, and be late with another payment, and then another, and another. Finally, you just give up and say, “Forget this!" and walk away from your loan(s).
What happens then? The government has a long list of consequences:
- The entire unpaid balance of your loan and any interest you owe becomes immediately due (this is called "acceleration").
- You can no longer receive deferment or forbearance, and you lose eligibility for other benefits, such as the ability to choose a repayment plan.
- You will lose eligibility for additional federal student aid.
- The default will be reported to credit bureaus, damaging your credit rating and affecting your ability to buy a car or house or to get a credit card.
- Your tax refunds and federal benefit payments may be withheld and applied toward repayment of your defaulted loan (this is called “Treasury offset").
- Your wages will be garnished. This means your employer may be required to withhold a portion of your pay and send it to your loan holder to repay your defaulted loan.
- Your loan holder can take you to court.
- You may not be able to purchase or sell assets such as real estate.
- You may be charged court costs, collection fees, attorney's fees and other costs associated with the collection process.
- It may take years to re-establish a good credit record.
- Your school may withhold your academic transcript until your defaulted student loan is satisfied. The academic transcript is the property of the school, and it is the school's decision—not the U.S. Department of Education's or your loan holder's—whether to release the transcript to you.
These are some serious -- even ugly -- consequences for blowing off your loans. If you're considering being less than faithful with your loan payments, I encourage you to bookmark this government page so that you can refresh your perspective and sober up any illusions that you may have along the lines of “This whole student loan thing is no big deal." As you can see, it is a big deal.
Keep in mind that there are ways to deal with personal hardship: Deferment or forbearance and changing your repayment plan(s). These alternatives can provide some relief from making regular monthly payments or lower the amount of those payments, providing a much better way to deal with loan difficulties. I urge you to explore them.
I also urge you not to buy into the “You're not alone" school of thought when it comes to pondering student loan defaults. About five million Americans are in default -- not merely delinquent -- on their student loans. There's lots of misery across the country in this area. Don't join this club!
The enormous number of people in arrears has given rise to the popular (and mistaken) myth of impending mass forgiveness. This will not happen. Thus, be aware of both the requirements for repaying your loans and the consequences for not doing so.
Although I intended this information for student loan holders, I'll extend my intention to include prospective college students, in particular those who will be high school seniors in the comings weeks. For you, I would hope that you become aware of the weight that student loans can exert on your life.
So, my message to you is: Don't allow the “prestige" or “dream school" factor to pull you into big loan debt. It's possible to be happy and successful in life and in your life's work without having to mortgage your future to attend a prestigious dream school. Please keep that in mind during your college process.
Final thought: Delinquency and default: Don't do it!