Strategic Student Loan Default: Always Backfires

Strategic default It is a plan to intentionally avoid paying your student loans.

In 2011, some protesters encouraged borrowers to do so Refusing to repay their student loans As part of the Occupy Wall Street movement. If enough borrowers join this protest, lenders will have no choice but to cancel student loan debt, they said.

Only a few people participated, and even those who did only lasted a month or two. No one defaulted as part of this protest.

Recently, after the Eighth Circuit Court of Appeals blocked the SAVE student loan repayment plan, some student loan protesters are once again urging fellow borrowers to intentionally default on their federal student loans as a form of debt disobedience.

Now, as student loan payments resume, more borrowers are considering intentionally not paying their debt.

This kind of strategic default on federal student loans was a stupid idea then, and it’s a stupid idea now.

When a borrower defaults on federal student loans, The only one harmed is the borrower, not the federal government. Borrowers cannot force the federal government to forgive their student loans by refusing to repay them. Borrowers have no leverage, not even if they work together as a collective group.

Even if borrowers have some leverage, the US Department of Education does not have the legal authority to forgive student loans, just as it does not have the authority to foreclose on defaulting borrowers. Only Congress has the power to pass laws to forgive student loan debt.

Why Strategic Default on Student Loans is a Bad Idea

The federal government has very strong powers to collect delinquent federal student loans. They will get their money, one way or another, and the borrower will end up paying the penalty. Here are some of the tools the government has at its disposal.

• The federal government can administratively garnish up to 15% of a defaulting borrower’s wages, without a court order. The wage garnishment exceeds the amount the borrower would have paid under an income-based repayment plan.
• The federal government can offset federal income tax refunds and up to 15% of Social Security disability and retirement benefits.
• A collection fee of up to 20% may be charged from each payment, slowing down the payment process.
• The federal government can block the renewal of professional licenses (including driver’s licenses in some states, but not just licenses for doctors, nurses, dentists, pharmacists, social workers, teachers, accountants, and lawyers).
• The borrower will be ineligible for FHA and VA loans, will not be able to enlist in the U.S. Armed Forces, and will lose eligibility for further federal student aid.
• The federal government (and private attorneys working on behalf of the federal government) can sue defaulting borrowers to collect debts. With a court judgment against the borrower, they can lien a larger amount, place liens on the borrower’s property and have a levy to seize the money from the borrower’s bank and brokerage accounts.
• The federal government can also confiscate a borrower’s lottery winnings.
• The federal government will report delinquencies and defaults to the credit bureaus, making it very difficult for a borrower to get any credit (or, in some cases, rent an apartment or get a job).
• Federal student loans are nearly impossible to repay in bankruptcy, so this debt will never go away.

Some people argue that the federal government benefits financially when a borrower defaults, especially if the borrower is able to repay the debt, because collection fees increase the amount recovered.

The federal government sometimes settles defaulted federal student loans, but only when the loans have been in delinquency for a long time. These adjustments are always greater than the loan balance when loans default.

These settlements only waive a portion of the interest or collection fees that have accrued since then. For example, a typical student loan settlement will forgive half of the interest that has accumulated since the loans defaulted.

The settlement must also exceed the amount the federal government expects to collect in the future. Borrowers can never get a discount on their existing loan balance by intentionally defaulting on loans.

A better way to protest

Frustrated borrowers should write to their members of Congress. If enough borrowers complain, it has an impact, because it makes policymakers worried about getting re-elected.

On the other hand, refusing to repay your student loans has no effect, because politicians don’t listen to critics.

Borrowers can also protest by paying off their debts more quickly by making larger payments, if they are able to do so. This costs the federal government more money, by lowering the total interest paid over the life of the loan.

It also hurts loan providers who only charge a monthly servicing fee until the loan is repaid. The federal government and loan servicers make more money when the loan is paid back over time. If you want to dispute a loan, make the lender lose money.

Borrowers can also take advantage of existing student loan forgiveness and discharge options, if they qualify, to eliminate their debt.

These types of student loan forgiveness, previously authorized by Congress, include closed school discharge, total and permanent disability forgiveness, identity theft forgiveness, borrower defense for payment relief, loan forgiveness for employees of federal agencies, Segal AmeriCorps Education Awards, NHS Loan Repayment Program, teacher loan forgiveness, and public service loan forgiveness.

There is also forgiveness after the borrower has made 20 or 25 years of payments on an income-driven repayment plan. A lender who has no loans does not get the money.

Related to:Does the government benefit from student loans?

Options for borrowers who are unable to repay their student loans

If the borrower is struggling financially, there are several ways to continue the personal moratorium, even though interest may continue to accrue.

For borrowers facing a short-term financial challenge, such as unemployment or medical leave/maternity leave, options include economic hardship deferral, unemployment deferral, and general forbearance.

Each of these options suspends the payment obligation for a maximum of three years, usually in one-year increments. But interest may still accrue and may be added to the loan balance if it is not repaid.

For more long-term financial hardship, there are income-based repayment plans, where the monthly payment will be zero if the borrower’s income is less than 150% of the poverty line. With the Save Payment Plan, the threshold rises to 225% of the poverty line (assuming it survives lawsuits).

Any excess interest accrued above the calculated payment will be forgiven if the borrower makes the required payment, including a zero payment.

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