3 Reasons to Never Default on Your Federal Student Loan

by Bethy Hardeman

You went to college for four years and got your degree. If you're like most Americans, you had to do it with a little help from Uncle Sam in the form of federal student loans. Two-thirds of the class of 2010 graduated with student loans averaging $25,250 per student, according to the Project on Student Debt. Even consumers aged 65 or more carry on average more than $32,000 in student loan debt, according to the most recent data from CreditKarma.com.

Nationwide, the student loan debt amount has surpassed $1 trillion, which is more than the national credit card debt. This heavy burden of debt, combined with a troubling job outlook, has led to an understandable rise in student loan debt default rates. Nearly 9 percent of student loan borrowers have defaulted on their payments, according to last year's Department of Education numbers, the most recent figures available.

It could be tempting to skip a student loan payment, especially if it's a matter of choosing one debt over another. If you miss your car payment, your car could be repossessed; what's the worst that could happen if your student loan goes into default? Here are three potential, serious consequences:

1. Your paycheck could suffer.

A student loan debt default-no matter how old-can lead to wage garnishment. That's what 58-year-old Linda Brice learned when lawyers representing the federal government drained her bank account of several thousand dollars and garnished one-fourth of her paycheck. All because she defaulted on $3,100 in student loans borrowed more than three decades ago.

Eventually, a judge ruled that Brice would only be required to pay $25 monthly toward the loan because of her difficult financial situation. But her story should serve as a serious lesson: defaulting on student loans could haunt you for years-even decades-to come.

2. It can affect your future employment.

Employers aren't just doing criminal background checks on job candidates-they're also taking a look at your credit report. This ethically questionable practice can lead to candidates being turned down because of past financial troubles. If your credit report is marred by student loan default, a hiring manager could be wary to offer you the job.

Fortunately, an employer may be willing to hear your side of the story. If you've come upon difficult financial times and missed a student loan payment or two, be prepared to explain the situation. Your willingness to talk about it could be the difference between getting hired and remaining unemployed-and unable to pay off your student loan debt.

3. Bankruptcy can't help you.

Declaring bankruptcy is not the first resort when you come upon financial hard times. For some people, though, it's the only resort. But thinking that your student loans will disappear with the rest of your debts is a mistake. These loans can no longer be discharged in bankruptcy.

Since the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, no student loan-private or federal-can be discharged in bankruptcy. The only exception? The individual declaring bankruptcy must be able to prove that the debt repayment would cause "undue hardship,"which is extremely difficult to do except in the case of severe disability.

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