Friday, July 23

Why Strategic Default Does Not Save Money on Student Loans?

Student loan

If you qualify for student loan forgiveness, paying down the college debt is one of the best ways to get rid of it, and bankruptcy can also provide a solution.

As a result, you might be considering intentionally defaulting on the student loan debt in order to see if you can settle for less rather than what you owe. Keep in consideration that this practice is common with other types of debts. Moreover, there are several debt settlement companies to help you do it.

However, when it comes to Strategic default private student loans, it’s doesn’t seem a better idea. Let’s why?

Why Strategic Default Won’t Help?

If you have defaulted on the student loans, keep in mind, the Department of Education will refer your account to a debt collection agency. Collection agencies offer three student loan settlement options that are:

  • A waiver of collection charges
  • A waiver with half of the interest accrued as you went into default
  • A 10% reduction of your total balance

There is a great need to know that none of these will save you money compared with keeping the loans in suitable standing. The reason is that collection charges on defaulted private student loans may add up to 25% of the combined principal and interest.

If you manage to get a 10% reduction of the interest, collection charges may neutralize your savings.

Why is there a need?

A student loan settlement is considered beneficial to borrowers who are in default on their federal student loans for a decade, as it discounts the interest that has accumulated the default. However, the U.S. Department of Education doesn’t settle for less than the loan balance when the student loan went into default.

It means a student loan borrower who is current can never save money by defaulting on the debt.

Furthermore, defaulting on strategic student loans can ruin the credit when the agency reports all past-due accounts to the three national credit bureaus. If there is a need to borrow money again in the future, you’ll have to pay a higher interest rate. But, if your credit is bad, lenders will consider you too much of credit risk as well as deny your application.

All significantly considered, strategic default student loans cost you a lot more rather than if you were to continue making your regular payments.

Defaulting Is Never Worth it

Many people default on student loans as they’re experiencing severe financial hardship. However, if you are able to manage to make the monthly payments or you can take benefits of opportunities to lower the payment or get outside help, defaulting will be the last thing you will want to do.

The reason is that it will not only cost you more to settle,  it will also destroy your credit by causing more hurdles in the long term. If there is another option, it would be best if you use those first in order to get the relief or help you need.

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