Updated June 7, 2019: Student loan debt is pretty out of control – a $1.4 trillion dollar problem – and people will do some pretty drastic things to get rid of it.
But what if you stopped paying it altogether?
"You get creditors calling you at all hours and your wages are garnished and you’re generally miserable," you say.
And you’re right. But that’s only if you’re in a place where you – and your wages – are accessible by the creditors. Here's a primer on student loans.
As the student loan debt crisis in America worsens, some might think about ways to escape the burden, like leaving the country.
Some graduates went to schools that were more expensive than they thought they would be; others didn’t realize how much the loans would truly cost with compounding interest; and others simply left the country, intending to pay, and then realized they didn’t have to. But there’s a danger to this method.
Moving to a different country won’t forgive your student loan debt and can cause lasting issues when it comes to your co-signers, your ability to secure credit, and your financial standing if you ever decide to move back to the United States.
Why you shouldn’t avoid your student loans
People have been leaving the country to avoid things for a while. Think about draft dodgers, or all of those people claimed they’re going to go to Canada if a certain politician won an election. But student loan dodgers?
Some student loan debtors can resort to desperate measures. But before you reach for your passport, it’s important to note that ditching your student loans in a foreign country is bad for your current life, your future financial situation and your loved ones.
The bright side of moving to Europe or South America or wherever? You can forget about your student loan debt and enjoy a beautiful new locale. The downside? Pretty much everything else:
Your debt is still in the USA
Even though your debt might be out of sight and out of mind, and you can’t be prosecuted for it, it could have far-reaching consequences.
Let’s just get this out of the way: If you leave behind your student loan debt, you’re essentially agreeing to self-imposed exile. If you move back to America (or even start working for a US-based company abroad), you’re subjecting yourself to the same problems you were trying to escape. Only this time, those problems have had months or years to compound, making them even worse.
This is because your interest will have kept growing on those loans. That means that the debt you’re scared of now will be that much bigger whenever you return.
Second, not paying your debt will do real damage to your credit score; defaulting on your loan will stay on your credit report for seven years, making it nearly impossible to get other loans. Defaulting can also affect your job prospects and your ability to defer payment. You’ll have to do a lot of work to rebuild your credit score, which can take years.
Finally, if and when you return to the United States, you’ll likely have your wages garnished when you begin working. The government can take 15% of your income out of your paychecks. That means you’ll begin paying again whether you like it or not, but this time it’s out of your control.
It’s hard to get started in other countries
When you move abroad, especially under financial duress, you’re essentially starting your life over from scratch. In order to set up that new life, you’ll need money – more specifically, cash.
Having a reliable source of money can help you set up residency in wherever you’re choosing to call home. Unfortunately, it can be hard to establish credit abroad. That means getting loans and charging things to your credit card aren’t going to be that simple. You just won’t have the credit history to do it. If you’re already having money problems thanks to your existing student loans, you might find it hard to buy a home or car, or just make immediate, everyday purchases, without a lot of cash readily available.
And since you’ll have effectively ruined your credit score back home thanks to not paying your student loan debt, you may find yourself out of a credit card even if you do make your way back stateside.
You’re leaving your co-signers out to dry
You know that pang of guilt you feel when your mom says, "You never call anymore"?
Now imagine that, but as "Because of you, the government is garnishing my paycheck, my Social Security and my tax refunds."
It’s a pretty specific complaint, but if you’ve set your parents – or anyone – up as a co-signer of your debt and skip town (or country), it’s not like the lender is just going to shrug. They’re going to move on to the other people who are on the hook for the loan.
If someone co-signed your loan, they will either have to pay your loan or be subject to things like badgering calls from creditors and garnished wages. While your co-signer was willing to take on that risk in order to give you access to a better rate on the loan, they probably didn’t count on you just up and leaving your debt to them. It can be a real hit financially, and it also makes you look like a real jerk (and makes for awkward family reunions and Christmas parties, assuming you can even re-enter the country).
How to handle your student loans
Okay, so "run off to [insert country of choice]" probably shouldn’t be Plan A when it comes to repaying your student loans. So what are your options when you feel pressure to pay for your education mounting?
Start paying while you’re still in school. It’s not hard to see how people easily get overwhelmed by debt. Some of your payment is going toward the principal, some is going toward the interest, and it feels like you’re not making much progress on either. If you get to it early, though, you’d be surprised at how much of a head start that gives you once you graduate. Paying just $30 a month starting your freshman year will help you stay ahead of the interest on your loans. If you can’t pay while you’re still taking classes, at least have a plan for your first year after graduation. (We have one here).)
Refinance your loans. One thing that all student loan debt holders should at least look into is refinancing their loans to get better rates. When you refinance your loan, you basically get a new loan at a new provider while they pay off your old loan at your old provider; you then pay the new provider for the new loan. You can refinance through most credit unions and big banks, but we’re fans of using Earnest in particular to refinance because of their low rates and flexible loan terms. As with everything, though, there are caveats. If you have a federal loan and you refinance with a private provider, you’ll be giving up certain protections like the Public Service Loan Forgiveness Program and deferment and forbearance. In that case, you might consider a Federal Consolidation Loan for refinancing.
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Choose the right repayment plan. Repaying your student loans isn’t a one size fits all prospect. Some repayment plans have a flat payment amount, while others have graduated payments that grow over time; some plans let you pay your loans over 10 years, and others over 25 years; some adjust your monthly payments based on your income. We talk about the pros and cons of seven different types of repayment plans here, and what that can mean for how much you’ll ultimately owe. You’re likely to find one that works for your circumstances – and lets you stay in the country.
You may also be able to pay off your loans with the help of your employer. Learn more here.
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