There are a growing number of individuals who are purposefully choosing to default on their student loans, especially private student loans, as a means of “taking control” over their financial futures, according to a published report.
Called strategic default, it involves individuals knowingly choosing not to make payments on their student loans, either because they can’t afford to or because they are trying to get the lenders to offer lump sump settlements for less than the total amount owed.
The report says that “a strategic default could put borrowers on a path to settlement,” which can offer the opportunity to pay less than what is contractually owed while also allowing the individual to start rebuilding their credit sooner, instead of waiting for the entire balance to be repaid.
Strategic defaults do not work with federally guaranteed student loans, the report states — only private student loans originated by a bank or some other financial services company.
There are downsides to choosing to default on a student loan — or any financial obligation, the report discusses. The lender may opt to sue the individual and could obtain a judgment, which would allow the lender to have the individual’s wages garnished or seize funds from the individual’s bank accounts. As well, the lender may not choose to offer a settlement, which would add court fees, late fees, and other financial penalties on top of the amount already owed.
Even with the downside, the “community” of individuals who are choosing to strategically default on their student loans is growing, according to the report. And some of their motives may be dangerous. From the moderator of a sub-Reddit dedicated to dealing with student loan defaults:
“It’s not just about strategic default. We want to get a massive number of people together so that we can kick off a debt repayment strike. The goal is to break the student loan collections system.”
