No one wants to default on medical school loans, but sometimes, crap happens. But just because you are bankrupt does not mean the debt will go away by itself. If you are thinking about defaulting on your loans, realize what will happen.
Bad Things Will Happen if You Default on School Loans
If you choose to ignore the loan for 270 days or more, your student loan will go into default. So what will happen?
- You (and possibly your parents) will get hounded by the collection agency.
- Your salary (up to 15% of the total amount) and tax refund can also be garnished.
- Your credit score would drop and it would be harder to get other loans (i.e. for house, car, etc.). Some employers also look at credit scores when deciding who to hire, so if your credit score is low, it could negatively impact your job search.
- You could lose your medical license.
- And on top of all that, the lender would add a fee to what you already owe.
In a nutshell, you could get into a very, very deep hole if you default.
Ways to Avoid Defaulting on School Loans
If you do not have enough money for loans, do not ignore the situation! Here are some actions you can take:
- Call up the student loan lender and working something out. Explain your situation. You are not the first person who has difficulty paying back the loan and you will not be the last person either. Three things could happen:
1. No changes are made. This is very possible if you have taken out private loans. When you default, the lender can hit you with fees and penalties, which means more money for it. However, if your lender is playing hardball with you, try to send in something (even it is $1) at least once every 270 days. Since you paid something, your loan is not faulted. If the government decides to extend some kind of relief to private loans, you will get to enjoy the benefits.
2. The repayment schedule is stretched over a longer period of time. You’ll pay less each month but you’ll end up paying more interest overall. This could be the break that you need. And when your luck changes for the better later on, you could always increase your payments.
3. The lender could put you on deferment, which means you do not have to pay back anything now. However, the interest will accrue. So when you do pay the loan later, you’ll have to pay more. Again, this could be beneficial if you need a short break while you get back on your feet. Later when you make more money, you can pay back the loan.
- Consolidate your loan. Maybe you can get a lower interest rate and stretch out your loan over a longer period of time. This will reduce the monthly repayment. Again, you can always choose to pay more if you want to. Just remember that you can only consolidate once. So do it wisely. Check out the medical student loan consolidation for more information.
- Show that it is impossible for you to pay and that your only option is to default on medical school loans. You will have to meet with the judge to explain your situation. It is almost impossible to convince the judge you have absolutely no way to repay. But if you want more details about it, visit an article about student loans and bankruptcy.
- Apply for Income-Based Repayment if you have government-backed student loans. (The government loans are the Primary Care Loan, Perkins Loan, subsidized Stafford loan, unsubsidized Stafford loan, and Graduate Plus Loan.) If you earn only a little bit, your repayment would reflect your salary. For example, if you only earn $20,000 per year and you loan is $50,000, you only have to pay back $45 per month. If the loan amount is increased to $200,000 and you still only earn $20,000, the monthly repayment amount is only $45 per month. After 25 years of consistently repaying the loan, the debt is then forgiven. (But you may be taxed for the forgiven amount.) That is a pretty sweet deal! But as a doctor, you should be making more than $20,000, so it may not apply to you. But hey, it is worth a shot.
- Apply for loan repayment / forgiveness programs. This is how they usually work. You work a couple years in a rural or under-served area and in return, they pay your loan. See the medical school loan forgiveness programs section for additional information.
You Should Not Have to Default on Medical School Loans
As you can see, if you are falling on hard times, not all is lost. Medical school loans are indeed a burden. But as a doctor, you have a better chance to pay it off than any other profession. There are also options to relieve the burden of debt (noted above) if you need.
Just do not ignore the loan or else it will grow into something you cannot control.
If You Do Default on Medical School Loans …
If you read this article too late and you have already defaulted on medical school loans, the options listed above may not be available to you. Instead, you may have to:
- work with a company that specializes with defaulted loans
- get the advice of a financial advisor or a bankruptcy lawyer
- get out of default by going through rehabilitation (a federal program which helps bring your student loans out of default)
- flee the country
Defaulting is a pretty big deal. Try to avoid it as much as possible.
This article is part of the Medical School Loans series. Click on the link if you want more tips and hints about borrowing money smartly.