Never default on your loans. Bankruptcy and loan default are sometimes portrayed as the easy way out of apparently insurmountable debt, but these actions have severe negative consequences that will affect your long-term financial health. Defaulting on loans incurs fees and severe penalties. Defaulted loans remain on your credit record for up to seven years after the claim is paid; they will damage your credit rating, preventing you from getting credit cards, auto loans and mortgages, and may make it very difficult for you to get a job or rent an apartment or house.
Declaring bankruptcy is not a way to escape student loan repayment. Less than 1% of bankrupt borrowers succeed in getting their student loans discharged during bankruptcy proceedings, according to FinAid.org.
If you default on a federal loan, lenders can:
Don't wait until you're on the verge of bankruptcy before you evaluate your options for avoiding loan default. Contact your lender, and discuss your situation with them. Options are more limited for private student loans.
These tips can help you as you work to prevent default:
Federal loans offer more options for dealing with financial responsibility. Options include the following:
While forbearance may seem like a reasonable option when facing financial challenges, the interest that accrues during that period will be capitalized (added to the balance of the loan), and the net result is an increase in the life-of-loan cost. For example, using a $10,000 Stafford Loan at 6.8% interest and a 10-year repayment term, a 3-year forbearance almost doubles the total cost of the loan; a 6-year forbearance almost triples the total cost; a 9-year forbearance quadruples the cost; and a 12-year forbearance increases the life-of-loan total by 5.5.
Obviously, deferments and forbearances can provide short-term relief (with long-term implications that can be negative) but are not suitable for long-term financial difficulty. For long-term financial hardship, you should explore the options of extended repayment, income-contingent repayment or income-based repayment.
FinAid.orgQuick Reference Guide: Repaying Student LoansSolutions for Borrowers Who are Having Trouble Repaying Education LoansEconomic Hardship Deferment CalculatorDefaulting on Student LoansLoan Repayment ProtectionStudent Loan Debt Settlements
Federal Student AidAddressing Your Defaulted Student Loan
Fastweb.comThe Horrors of Defaulting on Education DebtStudent Loan Borrower Assistance
Safeborrowing.comStudent Loans: Financing Your Education