Student loan payments can be tough. This is especially true in the current economy where it can take some time to find a well-paying job once you graduate. If you're in a pinch, it might seem like the best option is to default on your student loans because your education can't be repossessed. While it can sometimes make sense to default on other loans, you should never skip out on student loan payments. Here's why.
Student Loans Can't Be Forgiven in Bankruptcy
If your escape plan is to default on your student loans and use bankruptcy to get out from under them, forget it now. Under federal bankruptcy law, educational loans are not dischargeable in bankruptcy. This includes both government-backed and private loans. You can't get around the law by trying to move student loan debt onto credit cards or personal loans, either. If it's determined that credit cards or personal loan proceeds were made to make student loan payments, those debts will count as educational debt and won't be dischargeable. In short, there is absolutely no bankruptcy fresh start for student loan debt.
Student Loan Debt Counts Towards Your Credit Score
Student loans are included in your credit report and credit score. When you stay in good standing, this is a good thing because they build positive history and add to your mix of credit. If you default on a student loan, they'll destroy your credit. First, you'll start losing points for each late payment, and just one late payment can drop a good credit score to below average. When your loans default, your score will drop even more. And because your loans can only be discharged by paying them off, the default will stay on your credit report until your loans are paid off, and it will affect your score for another seven years after that.
Want to Rent an Apartment or Buy a Home?
Most rental properties don't care about student loan debt. As long as you meet the income requirements, you should be approved unless your credit report shows a history of late payments. Why? Because landlords want someone with a history of paying on time. Since it takes so long to move past a student loan default, keep paying on time or you'll have trouble finding a rental for years to come.
If you're looking to buy, mortgage lenders will care about your debt in relation to your income, but at this point, there's not too much you can do about that. If you have high debt, lenders want to see a perfect credit report to see that you can manage it, and even a few late payments will spook them.
Want to Get a Job?
Employers are increasingly performing credit checks on a broader range of applicants. The thinking is that someone in debt is more likely to steal from the company to pay off their debts and that irresponsible behavior with personal finances predicts irresponsible behavior at work. Most employers get that students have to take out loans to go to school, and as long as your loans are in line with the amounts others are taking out, you shouldn't have a problem as long as the loans are in good standing. Once you've defaulted, though, you'll be sending up a huge red flag, and in this competitive job environment, it will likely be disqualifying.