71% of people who graduated from college in 2012 have student loan debt. Full disclosure, I have quite a lot. Like, so much. The average graduate borrowed around $29,000. The total number of student loans owed in the US today has surpassed 1 trillion dollars with numbers rising every year. It’s reasonable to expect that some if not many of those borrowers will have to default on their debt at some point. So, what will that look like? How bad is defaulting on your student loans? It’s pretty bad. Most students use federal loans to pay for their education, and the Federal Government has many ways to get back its money.
The Treasury Offset Program allows the US Department of the Treasury to take your tax refund and give it directly to the Department of Education to pay down your loan. They are also legally allowed to garnish up to about 15% your wages, which means taking money directly out of your paycheck. Some states also allow private loan companies to seize your state tax refund in the same way and if for some reason the Federal Government or a private company doesn’t think that any of these previous methods are quick enough, they can sue you for the full amount at any time. So, even if you default, the Government and these private companies are still going to get their money and that is just the beginning. Defaulting on any loan will have a negative effect on your credit score, which will make it harder for you to take out money in the future, to buy a house or a car, or start a business.
It may even affect your chances of landing a job or an apartment and there is no safety valve that can get you out of student loan debt. Bankruptcy cannot help you – even after you’ve liquidated all of your assets to resolve your other debts, you still have to pay your student loans. So, you really shouldn’t default on your student loans. If you are unable to pay them but they are not yet in default you have options. There are scenarios in which you can qualify for loan modification, deferment, or forgiveness. It’s always good to contact your lender before defaulting on a loan, since working with you to get their money back is in their best interest, and yours. With all of that said, if you have to borrow money for school, federal student loans are the best option, as far as affordability and credibility are concerned. Just make sure to work with them so that you don’t default.
Benefits and drawbacks of college loans
The great majority of students have debt when they graduate from college. The average for a student going to a public school is about $26,000 of debt. For a private school its around $29,000 of debt. – Taking out loans to pay for your education is a highly, highly, personal decision-making process and it gets complicated because I think families tend to advise students and sometimes that advice is very helpful and other times it’s kind of antagonistic because it just adds another pressure that you have to keep in mind and sometimes the pressure is to take out loans because no one has the money right now, or in other times it’s we’re not taking out any loans because we have no money to pay it back which might mean that if you’re not going to take out loans, you need to pay everything right now.
Which means you might have to work a whole lot more, somehow, in order to pay for your education and so my biggest advice is to think very practically about can you actually pay back those loans? Always have an understanding of what is your overall indebtedness. I see students get into trouble because they just keep taking out loans every year and then it’s a big surprise for them at the end of four years how much they owe. So you should know how much you’ve borrowed, you should know what that means in terms of monthly payments when you graduate. What’s the dollar amount that you’re going to be responsible for? And have an understanding of basic budgeting. What does that mean in terms of what will your lifestyle need to be when you graduate?
So don’t just take out those loans blindly. Know what the monthly payment obligation is going to be, what that means for you once you’re out in the world of work. Unfortunately, we can’t avoid those student loans forever. So it means taking out loans for reasons that will keep you in school. Taking out a loan because you want to do a really fun spring break probably isn’t a good idea. – So especially the work that I’ve done, and I was a low-income student, you have to think of loans in the context of going to colleges and investment in yourself. Yes, it’s debt, but it’s also an investment and if you realize that a student with a college degree makes a million more dollars over the span of their lifetime than a student with a high school degree, $26,000 of debt to a return of over a million extra dollars is a pretty good investment in yourself. So it takes a bit of a mindset adjustment.