Q: My wife and I bought a house and got married in the last year or so. I was lucky enough to have financially savvy parents that lived within their means and were able to retire early and pay for my college. My wife, on the other hand, went to an expensive four-year liberal arts school and graduate school to become a clinical social worker, and she financed all of it herself through student loans. She now has very close to six figures of college debt. What are the consequences of just choosing not to pay those loans? … I'm assuming just defaulting on those loans is probably a bad idea, but as every month goes by and we have to pay basically the equivalent of another mortgage payment on student loans, the thought of just not paying them looks better and better.
A: Simply put, defaulting on the student loans is a bad idea for any number of reasons. For one thing, the loans enabled your wife to get her postsecondary education and (I assume) the career she wanted. It's an investment that will pay off with time. For another, the student loans haven't stopped the two of you from getting married and buying a home. You're building a life together.
On the other hand, default would lead to a number of bad financial consequences. What could go wrong? Her wages could be garnished with default. The loan will be reported as delinquent to the various credit bureaus. The IRS can take federal and state tax refunds to collect on the defaulted student loan debt. You'll be dealing with debt collectors. Meanwhile, her total student loan bill will swell with various fees and additional interest charges. And so on.
Bankruptcy won't help. You can't discharge student loans — federal or private — in bankruptcy. Instead, I would adopt a twofold strategy. First, concentrate on paying off the private student loans as quickly as possible. Private loans are hard to modify if you get into a tight spot financially.
Federal loans are designed to be flexible. The standard repayment is a fixed amount each month for 10 years until the loans are paid off. That's your best choice. But if money gets tight, she could choose the extended repayment option; the graduated repayment plan; and the income-based repayment plans. The price of these choices is the total cost of the loans goes up, but since there is no prepayment penalty, you could always accelerate the pay down later on.
Chris Farrell is senior economics contributor, Marketplace commentator, Minnesota Public Radio.