Borrowers have a number of options at their disposal if they have issues repaying student loans. Indeed, many student debt borrowers are able to ask for a forbearance or deferment of their student loans if they satisfy certain requirements, and this can relieve pressure during trying times. Nevertheless, sometimes people cannot avoid defaulting on student loans, and some borrowers may actively shirk their responsibilities to repay student debt. In any case, borrowers may face many consequences of defaulting on student loans that they should be aware of before making any financial decisions.
Credit Score
One of the most important consequences of defaulting on student loans is that this will negatively impact your credit. Credit bureaus generally like to see that borrowers are repaying debt because this usually means that they can be trusted to repay more debt. However, if you default on student loans, it is likely that this will be reported to the credit bureaus. This will likely negatively impact your credit including your credit score. A lower credit score can make it more difficult to purchase a car, buy a house, or reach other financial milestones. As a result, defaulting on student loans can do long-term damage to your ability to meet financial goals for years to come.
Professional Licenses
Another one of the important consequences of defaulting on student loans is this may make it more difficult to enter certain professions. Many careers require that individuals show that they have a solid credit history. For instance, security clearance applications often require that applicants disclose how much debt they have and whether they are in good standing with their debt. The reasoning behind this policy is that financial responsibility may be indicative of other kinds of responsibility and individuals with debt may be easier to blackmail. In addition, attorneys often need to disclose their debt amount and whether they have ever defaulted on any loans as part of the character and fitness process to be admitted to the legal profession. Moreover, individuals who enter certain financial roles often need to show that they have a clean credit history, since they might be more tempted to steal money if they have debts that they are having trouble paying.
In addition, individuals may even lose professional licenses as one of the consequences of defaulting on student loans. For instance, many states permit law licenses and other professional licenses to be suspended if an individual defaults on their student loans. The reasoning behind this policy is that student loans were borrowed in part to obtain such professional licenses so they should be suspended if you cannot pay off your loans. The rules regarding the suspension of professional licenses varies from state to state so it is important to check the rules in your state to best gauge the consequences of defaulting on student loans.
Collections
One of the most annoying consequences of defaulting on student loans is that the debt may be sent to collections. This is essentially the process through which the lender attempts to recover money that is allegedly owed to them. Although there are now protections against aggressive collection tactics, debt collection can still be an annoying process. Collectors may call you numerous times a day, even if these calls are usually limited to only certain times during the day. In addition, you may also receive letters in the mail, which can be scary and harassing. Furthermore, lenders may take more formal legal action in order to place liens on your assets, take money out of your bank accounts, and pursue other steps in order to recover unpaid money. There may be some out-of-pocket expenses associated with defending such actions, so student debt borrowers need to carefully evaluate whether it is in their interest to actively default on student loans and risk such collection efforts.
Reputational Problems
Another one of the consequences of defaulting on student loans that will be important to some more than others is the reputational issues associated with not paying student loans. Paying off any debt, especially student debt, is typically seen as a sign of maturity, personal responsibility, and other positive traits. It takes a lot of discipline and resolve to pay off student debt, and people may infer that student debt slayers have such qualities because they were able to accomplish this goal. Of course, some borrowers are virtually set up to fail with their debt, so some may not plausibly be able to pay off their loans, but this is a common perception in any case.
However, individuals who do not pay off their student loans may be seen as irresponsible and undisciplined, no matter what the specific conditions of their debt repayment is. In fact, some politicians have received a fair amount of flack for maintaining high student debt balances, failing to pay off student loans, and other instances of perceived financial irresponsibility. Even if such assessments are unfair, some borrowers may wish to avoid any negative reputational inferences by staying on top of their student loans.
All told, there are many consequences of student loans that can have a substantial impact on your life and financial goals for years into the future. As a result, student debt borrowers should try to stay current with their student loans and avoid defaulting on their debt in most situations.