The best way to get rid of your college debt is to pay it down unless you qualify for student loan forgiveness. Bankruptcy won’t solve the problem either.
Consequently, you may consider intentionally defaulting on your student loan debt to see if you can settle for less than what you owe. Debt settlement companies can assist with this process, as it is common with other types of debts.
It is not a good idea to use strategic default when it comes to student loan debt. Read on to learn why.
Defaulting Strategically Won’t Help
In the event that you default on your student loans, the federal government typically refers your account to a collection agency. There are three types of Strategic default private student loans settlements that collection agencies can offer without prior approval from the Education Department:
- Collection charges are waived
- You will be waived half of the interest accrued since you went into default
- Your balance will be reduced by 10%
You will not save money by doing any of these instead of keeping your loans current. Due to the fact that collection charges on defaulted student loans can add up to 25% of your principal and interest.
Hence, even if you get a 10% reduction of your principal and interest, collection charges can cancel out the savings.
Borrowers who have defaulted on their federal student loans for a decade or more are most likely to benefit from a student loan settlement, since it discounts the interest that has accumulated since the default. Nonetheless, the U.S. Department of Education will never settle for less than the original loan balance when the loan has gone into default.
Thus, borrowers who are current on their student loans will not save money by defaulting.
Additionally, the collection agency that reports the past-due account to the three national credit bureaus can ruin your credit if you default on student loans. You’ll likely have to pay a higher interest rate if you borrow money again in the near future. Lenders may reject your application if your credit is bad enough.
When it comes to student loans, a strategic default will likely cost you much more than if you continued to make regular payments.
Defaulting On Student Loans In A More Effective Way
Below are some better options to consider if you’re struggling to make ends meet with your current monthly payments.
Forgiveness of student loans or assistance with repayment
You may be able to obtain some help paying off your student loans from the federal government, state and local governments, and certain employers. It may be possible to eliminate a large amount of debt in a short period of time, whether you receive assistance in paying down your balance or outright forgiveness.
Planned Repayment Based on Income
In order to reduce how much you pay each month, the U.S. Department of Education offers income-driven repayment plans. Based on your income, family size, and state of residence, your payment will be determined by a percentage of your discretionary income.
Your repayment term will be extended to 20 or 25 years once you’ve been placed on an income-driven repayment plan, after which the remaining balance will be forgiven.
Loan refinancing for students
Through student loan refinancing, you may be able to reduce your monthly payment, interest rate, or both if you have excellent credit and a solid income.
You may lose certain benefits when you refinance federal loans with a private lender, including access to forgiveness programs and income-driven repayment plans.
In addition, many refinance lenders offer variable interest rates that increase over time, potentially costing you more in the long run. Consider the benefits of a fixed rate refinance before you refinance.