Economy & Jobs

How Defaulting on Student Loans Will Wreak Havoc on Your Financial Life

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The 40 million Americans with student loan debt know how much of a burden it is. Student loans take a huge bite out of your budget and force you to delay other life goals.

You may wish they would just go away and fantasize about not paying them back. But in actuality? If you stop making payments for 270 days, you’ll end up defaulting on student loans. Once your loans are in default, your entire unpaid balance is due immediately. Your loans will then be sent to a collection agency, and they’ll be reported as delinquent to various credit agencies.

Defaulting on student loans made headlines recently when a controversial New York Times op-ed shared the author’s experience of not paying back his student loans. He even brazenly encourages others to do the same. What’s not mentioned in the article, however, are the very serious financial ramifications.

Defaulting on your student loans is a serious matter that can affect you and your financial life for many years to come. Here’s how:

Your Wages Can Be Garnished

Think that you can stop paying your student loans and avoid any consequences? Think again. When you are in default, the government can legally garnish your wages. It will deal directly with your employer to withhold up to 15 percent of your income until your loans have been recouped entirely.

Your Taxes May Be Withheld

Borrowers that are in default can have their federal and state taxes withheld to help pay the defaulted student loan. So, if you stop paying your student loans, then it’s unlikely you’ll be eligible to receive a tax refund.

Your Credit Score Will Tank

When you sign a legal contract that promises repayment, and then you defy that contract and stop paying, your credit will be obliterated.

Your credit score and credit reports are two items that lenders use to assess your risk. If you are in default, your credit score will go down, which will make it very difficult to get approved for housing, loans, and credit cards.

Your Social Security Benefits Can Be Garnished

Borrowers that commit to the default lifestyle may find themselves with a bit less cash come retirement. The government can legally garnish up to 15 percent of your Social Security wages.

According to an article on Bankrate.com, “A 2005 U.S. Supreme Court case (Lockhart v. U.S.) determined there is no statute of limitations on Social Security offsets to repay student loans. The government can shave off up to 15 percent, provided your remaining monthly benefit doesn’t drop lower than $750.”

In short, defaulting on student loans will wreak havoc on your financial life and should be avoided at all costs. If you’re having trouble making payments, get in touch with your lender about alternative repayment options. Consider going on an income-driven plan, which caps your federal loan payments at 10–20 percent of your income.

Although paying back your student loans may seem like an impossible dream, defaulting on student loans will be a nightmare you have every night for the rest of your life.

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Melanie Lockert is a freelance writer and passionate debt fighter who writes at DearDebt.com. She is currently climbing out of $81,000 in student loan debt and is often dreaming of her next adventure. Her work has appeared in the Globe and Mail, Rockstar Finance, GoGirl Finance and more. She has her M.A. in Performance Studies from NYU, loves karaoke, is obssessed with the Wizard of Oz, and is a ceviche connoisseur.