Here’s why it’s not a good idea to deliberately default on your loans to get a loan settlement. Megan McArdle points out a passage by FinAid’s publisher Mark Kantrowitz on what a loan settlement looks like:
Settlements do occur on student loans, but deliberately defaulting on your loans to try to obtain a settlement is not an effective strategy for saving money. Interest continues to accrue on a student loan after default. After a few years of nonpayment the accumulated interest is substantial. Only part of that interest will be reduced if you happen to obtain a settlement. In the meantime 25% of any voluntary or involuntary payments will be deducted for collection charges. Ultimately this means that you will be paying much more on the loan than if you hadn't defaulted and it will take you much longer to pay off the balance. The government has very strong powers to compel repayment. They can take up to 15% of your paycheck, offset your income tax refunds and even seize lottery winnings to repay the defaulted loan, all without getting a court order. Settlements are rare, mostly because very few defaulted borrowers can afford to make a lump sum payment of the amount owed, and usually involve either no less than a 10% discount on the total amount due (including interest) or the full principal plus half the interest. See http://www.finaid.org/loans/se... for more details.
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