Over and over again I hear the student loans are “good debt” or that you should let student loan payments go as long as you can, since they’re usually so cheap. According to the Department of Education, between 10 and 15 percent of student loan borrowers do not repay their loans. Here are four student loan gotcha’s that will make bad times worse, and make student loans riskier than they seem.
1) Student Loans Aren’t Discharged Through Bankruptcy
You’ve may have heard this one before, but it bears repeating: if you file for bankruptcy, your student loan won’t be dismissed in the bankruptcy.* This is a terrible risk that just doesn’t get the attention I think it deserves. Let me paint a picture for you: most people pursue higher education in order to improve their job skills and get a better paying position. Let’s say that after a student begins college but before graduation, life intervenes, and they are unable to complete their education. Now, not only do they have whatever problem life threw at them, but they are also still under-earning since they haven’t completed their education and now they have to pay back their student loans. Heaven help them if the cause of hardship is medical. When you’re down, not being able to discharge student loans in bankruptcy is a terrible burden.
2) Administrative Wage Garnishment
When you don’t pay most debts, the lender has the option of suing you and then garnishing your wages. The Feds cut out that cumbersome “going before a judge, suing you and proving their case first” step, and they can simply send a notice to your employer and start taking some of your paycheck. The FSA website says that they can take up to 15% of your disposable income. While hardship consideration exists, I bet it’s harder hardship then what got you to default on your student loan in the first place.
3) Tax Refund Offsets
Are you depending on your tax refund or refundable credit to get you through tough times? Well, did you know that the government can put a student loan default indicator on your tax refund that will cause your refund to be held to pay off your defaulted student loan. By the way, if you take out a refund anticipation loan and then the refund doesn’t come through, you’re still on the hook for the loan.
4) Federal Payment Offset
Much like tax refund offsets, your state or federal payments may be withheld to pay down your student loan. So I hope you’re not depending entirely on your Social Security payments, because a portion of that payment can be held for payment of your student loan.
I bet the people who call student loans good debt don’t think about this sort of thing. I’ll bet they just assume that you’ll be in the 85%-90% where things go as planned. I’m sure the 10%-15% that went into default thought the same thing. After all, do you know of anyone who got a student loan while expecting to not pay it off after college?
By the way, don’t forget that if you co-sign a student loan, you’re on the hook just like the student who signed it. This is something I don’t think a lot of people who co-sign for student loans think about. They usually only think about he scenario where everything works out, the student gets the education and improved job, and pays off the loan without any trouble. Remember, though, the 10 to 15 percent default rate. That can happen to you.
* GENERALLY. If you have specific questions about bankruptcy and student loans, speak to a qualified attorney. According to Nolo.com, there may be situations where student loans may be discharged in bankruptcy. Remember, I’m just sharing some general knowledge here.