Common Financial Mistakes: Defaulting on School Loans

Nowadays it's hard for many people to make ends meet. Lost jobs, fewer hours, piles of medical bills and countless other problems have created difficult financial situations for many Americans. These problems have forced honorable people to miss payments on everything from homes to cars to school loans.

Unfortunately, missing these payments can have dire consequences. Repeatedly foregoing your home payment can force the bank to mark you as defaulted, and you could lose your home. Miss too many car payments and the car could be repossessed. But if you miss too many school loan payments, your credit score could become damaged seemingly beyond repair. Let's take a closer look at this last default: school loans.

Your Promise to the Government

When you took out your school loan, you borrowed money from the government. You signed a few forms that basically promised you would pay them back. The government took you at your word and gave you some of the cheapest money around to better yourself and contribute to society.

However, if you stop paying them back without giving them a heads up, they don't take kindly to the snub. Basically, if you default on the loan (stop paying for 270 days), they get even in the form of a sizable credit score ding and a few nasty notes on the scorecard.

How This Affects You

Obviously, a huge credit score ding will affect you if you wish to borrow money in the future. Banks, credit unions and credit card companies may think twice before loaning you money; or they may refuse to lend you money; or they may lend you money at any astronomically high interest rate.

In addition, if you decide you ever want government help again – say if you want to return to school with a government loan, take out a Federal Housing Authority (FHA) home loan or apply for a Veterans Affairs (VA) home loan – the government will not let you do so until you clear up your defaulted loan with them.

In many cases, the government can also garnish your wages for the defaulted loan. They can take up to 15% of your wages until the school loan and any of the added default fees are cleared up. To do this, they simply have to sue you, and they will most likely win.

How to Avoid Default and Recover from Default

For anyone who is in danger of default, there are a few ways to get back on the good side of Uncle Sam. First, calling up your lender can be the first step to making peace. There are quite a few programs available to get you back on track, and Uncle Sam can be surprisingly understanding if you give him a heads up that you need a break in payment options.

On the other hand, if you have already defaulted, you most likely have some credit dings already, courtesy of our same kindly Uncle Sam. Thankfully, even after default, the United States government will help you out if you enter rehabilitation. For details, see your current school loan holder.

Times may be tough for many people, but if you know that the government understands, you and Uncle Sam can work together toward your goals; calling your creditors to work out a deal could save you time, money and headaches.

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