If you have read prior articles on this website, you probably know that I typically suggest paying off your student loans and staying current on student debt at all costs. Indeed, making late payments on your student loans or no payments at all can jeopardize your credit and your financial future. However, in certain situations, defaulting on student loans can be advantageous. Although, it usually does not make sense to purposefully default on student loans, if individuals happen to default on their student debt they might be presented with opportunities to get ahead financially.
It should be noted that a default on a student loan does not just mean that an individual has refused to pay their student debt. Indeed, many student loan agreements state that a default will occur if any of the borrowers or cosigners declare bankruptcy. In addition, a default may even occur if a cosigner dies during the life of the loan, a situation my brother has discussed in a guest post on this website. Usually, it is one of these alternative defaults, rather than merely not paying student loans when they are due, that can result in some benefits for borrowers.
One of the main reasons why defaulting on student loans can be advantageous is because after a default, individuals may be able to negotiate a new payment plan on their debt. After a student debt debt borrower defaults on a student loan, the account may be referred to a collections professional. This person has a substantial amount of power over how the debt is managed from that point forward, and may be able to negotiate a payment plan that is more beneficial to the student debt borrower than their regular payment plan.
For instance, defaulting on student loans can be advantageous since a payment plan offered by a collections professional may require the student debt borrower to pay less money over the life of the loan than they would under the original loan terms. Indeed, a collections professional may decide that in order to close their file, and have the debt paid off sooner, the collections person would be willing to reduce the overall amount owed. Indeed, my brother wrote an article on how he was able to negotiate a lower overall payment amount in exchange for completely paying off one student loan sooner, and if you have the resources to pay off student loans faster, this could be an advantageous option.
Another one of the ways how defaulting on student loans can be advantageous is that this may be a situation in which a cosigner is taken off the student loans. Many people need a cosigner, usually a parent or close family member, to cosign their student loans in order to borrow money for educational expenses. However, it can be difficult for cosigners to remove themselves from student debt since creditors may wish to have these individuals liable for the debt if anything happens to the primary borrower.
However, a situation of default may be a circumstance when a cosigner is removed from student debt. For instance, it is possible that even after student loans go into default due to bankruptcy, the bankrupt party may be removed from the student loans. Depending on your circumstance, this may be beneficial or deleterious, but the fact remains that defaults can change the structure of student debt.
Moreover, defaulting on student loans can be advantageous if it shows that you have financial need. Certain kinds of benefits can only be applied for if someone has genuine financial need. For instance bankruptcy protection is extremely difficult to obtain for student debt, but evidence that an individual has defaulted on student loans may help the debtor make the best case possible that they need bankruptcy in order to have financial relief. There may be other financial aid benefits from schools and government programs that can only be realized if a person shows genuine financial need. Of course, it rarely makes sense to “game” the system and default on student loans to show genuine financial need. However, this can sometimes be a consequence of defaulting on student loans.
Another way how defaulting on student loans can be advantageous is since this can provide motivation to right the ship and make the right moves financially. Many people do not understand the consequences of defaulting on student loans. Depending on your situation, the consequences can be serious, and they can lead to financial issues, professional problems, and other troubles. Such consequences can seem like a distant problem to someone who has not experienced them.
However, after defaulting on student loans, and witnessing the issues that come with this, people might know from firsthand experience how defaults can have an impact on their life. Indeed, I know a few people who had a rude awakening after defaulting on student debt and afterwards they developed better financial habits. If people react in this way, they may be able to realize benefits from a negative situation.
All told, defaulting on student loan can be advantageous in certain circumstances. However, this positive impact of this situation can only be realized if borrowers are resourceful and try to make the best of the situation.