Around 70 percent of American students figure they’ll get a student loan, graduate from a four-year university and get a great job to pay it off. Seems like a great plan—in theory. Student loan default totals nearly $74.9 billion with 4.3 million borrowers on the hook for that debt.
Reality of Student Loan Default
It’s no secret the rising costs of education are forcing more college students into taking on student loans equal to an amount greater than they would normally qualify for if they were seeking a bank loan for something like a car or a home. Some take out federal loans, others take out private loans, and some take out both types of loans.
Even if the student does not graduate, he/she is still responsible for the repayment of the loan. For those who graduate, they enter the “real” world to discover the cold, hard reality of their previous actions. They can’t afford their payments simply because they don’t make enough.
A student loan becomes delinquent when a student is unable to keep their accounts in good standing. Delinquent accounts are reported to the credit bureaus after a payment has not been made for 90 days. When it comes to federal loans, if a payment has not been made to the account for more than 270 days, it defaults.
Negative Impact of Student Loan Default
There are personal and economic consequences of allowing your student loan default. Permanent student loan defaults negatively impact the entire economy by becoming a drain on the taxpayers in the U.S. Additionally, if the federal budget lacks incoming revenue from loan paybacks, funds cannot be given out to new students.
Economic impact of student loan default:
- New businesses can’t form due to student loan debt
- Those who start a business in spite of student loan debt are unable to obtain loans that could help them succeed
- Borrowers don’t put as much back into our consumer-driven economy, spending less on goods and services because they can’t afford it
- Housing market stagnates due to a lack of buyers
Many of the listed penalties impact the nation by limiting an individual’s contribution to our economy. Those who meet their financial obligation are putting a large portion of their income toward their student loans. This means they cannot save, invest, or do much else because of the lack of extra cash flow.
For example, if a young couple defaults on their student loans and ends up with poor credit, they won’t be able to buy a home with a line of credit through their local bank. Others go into student loan default and account for 22 percent of the nearly 44 million with student loan debt.
Personal impact & consequences include:
- Inability to purchase a home as a young adult
- Unable to build credit by purchasing a car or opening a credit card
- Garnished wages
- Lose eligibility to additional federal student aid
- No longer qualify for deferments or a repayment plan
- Accelerated interest payments
- Unable to buy/sell assets
What does the future hold?
As it stands today, the investment in a college degree is worth it in the long run. However, as the cost of college continues to steadily increase, the benefits may no longer outweigh the risk of student loan default.