Student-loan payments have become a worrisome reality for a generation of young adults.
Many are shocked at the size of the payments they face after college and find it especially challenging to make those payments in the early years of their careers when their earning power is often at its lowest.
The urge to blow off those payments is understandable, but it could be a life-long mistake that makes your current student-loan obligations look fairly mild by comparison. Before you decide that defaulting on your student-loan payments is your only course, it is best to know the consequences and the alternatives.
The challenge of student loans
There is no question that the recent generation of students faces a student-loan burden unlike anything faced by previous generations.
The latest figures from the Federal Reserve show that the total student-loan debt outstanding is approaching $1.6 trillion, a figure that has more than doubled in just ten years.
To break that total down into individual terms, according to data compiled by credit-monitoring firm Experian, 14.4 percent of U.S. consumers now have a student loan with an average balance of $35,359.
Given the size of this burden and growing political pressure to do something to ease it, many students feel justified in simply ignoring their student-loan-payment obligations. That, however, is a decision that is likely to make a bad problem even worse, so it's wise to consider other alternatives that could help with student loans.
Consequences of not repaying your student loans
Think paying off student loans is an impossible burden? The consequences if you don't may be even worse:
- Your credit history will suffer
Missed student-loan payments are reported to the major credit bureaus, which financial companies routinely check before extending credit to consumers. This means that student-loan default or delinquency might make it tough for you to get a credit card or a loan in the future and, if you do, it may come with a higher interest rate.
- You may find it tough to get a job or an apartment
Financial companies aren't the only stakeholders interested in your credit history. Increasingly, employers and landlords check credit history for clues as to how reliable their potential hires or tenants are.
- The government may garnish your wages
If you do get a job, the government may garnish your wages (as well as tax refunds and government benefits) if you have defaulted on a federal student loan. So, you'll be making payments anyway, but still suffering the consequences of non-payment.
- You may get sued for non-payment
Under some circumstances, the government or a private lender may sue you for non-payment. This means legal bills could be added to your student-loan debt.
- Your payment obligations become steeper and less flexible
If you default on a federal student loan, the remaining amount you owe becomes due immediately. You also lose eligibility for borrower assistance such as student-loan forbearance, deferment or alternative payment plans.
- Professional and driver's licenses may be suspended
Some states suspend professional licenses or drivers licenses if you are in default on a federal student plan, which could seriously hinder your ability to work.
Making it easier to repay your student loans
After reviewing those consequences, you may realize that keeping up with your payments is the best choice, but that still doesn't make it easy. Here are some things that can help:
Plan for how much of your paycheck is going to be eaten up by student-loan payments. Ideally, you should do this before you borrow the money by comparing a repayment schedule with typical wages in your chosen profession.
If you have already borrowed the money, plan around how much your payments will be and when they will start coming due before you take on any other financial obligations such as a lease.
- Contact your loan servicer
If you anticipate problems making your payments on time, your first move should be to contact your loan servicer. Note that this servicer may be a different organization from your original lender; just check your payment plan information to identify your loan servicer.
Especially if you have a federal student loan, your loan servicer may help you find special programs to ease the repayment burden, such as income-based-student-loan repayment. If you contact your loan servicer, there is a chance they may work with you. If you simply avoid making your payments, you can expect the relationship to be nothing but adversarial.
- Know your rights
Fortunately, since most student-loan debt is via government loans, there are several provisions in place that help protect borrowers. The Federal Student Aid website is a good source of information on your rights and repayment options.
Taking out a student loan is the first major financial decision many young Americans make. How you handle that loan could set the tone for your financial circumstances for decades to come.