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Strategic Default: Taking Control of Student Debt

By Benjamin Platt, Contributing Writer

A rising number of borrowers are actively defaulting on their student loan debt to take control of their payments and force their creditors to the negotiating table. Called strategic default, this tactic is growing in popularity among borrowers who feel—understandably—that they were pushed into a lifetime of debt at a young age by a system that set them up to fail. Student loans are the single largest non-housing source of consumer debt in America, and, as we’ve discussed on this site previously, they impact much more than just recent graduates.

Borrowers who can’t afford their payments and are watching their credit scores plummet - taking their financial futures along with them - are rallying to strategic default as a way to take control and take a stand.


What is strategic default?

A loan becomes delinquent when you miss one or more payments. After 90 days of missed payments, it is considered seriously delinquent. With most forms of debt, once a loan becomes seriously delinquent, the lender may employ a collection agency or sell it off to a debt buyer. With student loans, lenders often don’t take those steps until you actually default, meaning you haven’t paid for at least 270 days, or around 9 months.

Defaulting on student loans can carry risks such as the creditor garnishing your wages (assuming you are one of the grads lucky enough to have a stable paycheck), seizing your tax refund, becoming ineligible for deferments or forbearance on federal student loans, the potential of being taken to court, and the damage a default does to your credit report.

This is in addition to some of the less-discussed consequences of defaulting, such as the emotional weight debt, the stress it can cause in your personal relationships, and ruining your connection with your co-signer, if you have one. 

Strategically defaulting, however, carries a benefit that you know about these factors going in, and can prepare for them. Once you take away the fear of these consequences, you take away one of your creditors’ biggest weapons against you.


Clearing Private Student Loans with DebtCleanse

private student loans - FB


Of course, the term “strategic default” can be a bit misleading. It sounds like people who could otherwise afford to pay their loans are defaulting on purpose as part of some sort of master plan. In truth, the large majority of strategic defaulters are borrowers who are completely overwhelmed by their debt and who are already heading toward a default. But rather than just defaulting and accepting the inevitable consequences, whatever they may be, these borrowers are going into default with clear eyes, heads held high, and a plan to use their default as a stepping stone to a better long-term result.

Strategic defaulters realize that there is power in nonpayment. Creditors would rather get something than nothing. Defaulting can be a potent first step toward getting them to accept smaller ongoing payments, or far better, one discounted lump payment that squares the debt once and for all.


Making a statement

While it’s safe to assume that many strategic defaulters are only concerned with their own financial well-being, there are unquestionably those who see it as a political statement, as well.

The subreddit r/studentloandefaulters is a 7,000 member community whose description states, “This is a forum for those who are coming to the realization that there may never be relief for student debtors, and that the time may be coming soon that we need to take matters into our own hands.” Members share their own stories of crushing student loans, warn each other of shady debt collection practices, and swap news and advice on strategic defaults.

While individual posts vary in their level of political engagement, there is a deep undercurrent of belief among the commenters that widespread strategic default is the only thing that will shock the American government into making meaningful reforms to what they see as a deeply broken social contract.

These strategic defaulters espouse the belief that they were pushed into taking on massive loans when they were too young to have any sort of advanced financial literacy, all under the promise that a college degree would guarantee them a good-paying job that would enable them to afford a home and support a family. But upon graduation, those jobs didn’t exist, or if they did, wage stagnation meant they couldn’t afford a home. Or even if they thought they could, lenders wouldn’t give them a mortgage.

Why? Because they had too much student loan debt.

They graduated into a world of uncertainty where the only sure thing was that their creditors expected to be paid no matter what. In the face of a massive industry designed to funnel young people into decades of debt based on false promises, these strategic defaulters believe the only reasonable response is to hit the system where it hurts—in its bank account.

As one Redditor wrote in response to a chilling article about a GOP-backed bill currently on the floor of the U.S. Senate that would allow the federal government to automatically garnish delinquent borrowers’ paychecks that revealed that 1 in 5 borrowers are in default:

“…we need to bump those number to 4/5 in default. The simplest way to end an exploitative system? STOP PARTICIPATING!”


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The power of defaulting    

The “strategic” part of strategic defaulting comes when borrowers recognize the consequences of defaulting and use them to their advantage. Wage garnishments can be fought. Court cases are expensive, time-consuming hassles that a creditor may not see as worth pursuing. Harassing debt collectors can be kept at bay with a few well-placed letters (DebtCleanse Premium Members get access to a letter generator that makes it as easy as possible to get that peace and quiet). Even the nastiest mark on a credit report - chapter 7 bankruptcy - falls off after ten years. And the simple act of refusing to pay can lead creditors to accept a smaller settlement.  

Strategic defaults actually hit some of the key steps in DebtCleanse’s recommended plan for dealing with unaffordable debt. What the robust discussion in the student loan defaulters subreddit misses, though, is that strategically defaulting doesn’t just create the possibility that your creditors will negotiate—it can create the opportunity to make them negotiate.

When your creditor—whether it’s your original lender, or more likely a collection agency or debt buyer—comes after you to collect, you can force them to prove that you really owe them, and that they really have any right to the money. You can dispute their claim to the debt, and demand they show the full paper trail that comes with it. That gives you the chance to look for mistakes and deficiencies in their paperwork.

Originating lenders make mistakes all the time, even student loan giants like Navient. Even the U.S. Department of Education. And when lenders package up loans and sell them to debt buyers, in the vast majority of cases key documentation goes missing, gets mixed up, or is simply never included in the sale at all. Finding these deficiencies is the difference between simply preparing for the consequences of defaulting and using your default as the starting point for an all-out offensive against the creditors who want to keep you trapped in the debt cycle.

“Oftentimes students are teenagers when they first start school and they’re not very financially sophisticated, as they shouldn’t be, but these lenders and schools are taking advantage of that lack of sophistication and exploiting it. Now, several years later, these debtors are unable to pay and can find these deficiencies and exploit right back.”

DebtCleanse Founder and CEO Jorge P. Newbery

A DebtCleanse premium membership gets you access to a list of over 130 possible deficiencies that creditors can often make. Membership also unlocks a nationwide network of affordable attorneys who have been empowered to find these deficiencies and use them to help people like you settle their debts for pennies on the dollar, or even get them forgiven entirely. Members receive a free consultation call and document review every month, and 25% savings on any additional legal fees.

It’s one thing to hope that your creditor won’t bother with the expense of taking you to court. It’s another thing entirely to make them question whether their claim to your debt will even hold up in the eyes of the law.

Unaffordable student loans can be fought, even federal ones. Strategic defaults are just the beginning. Join DebtClease today and take the first step toward a debt-free future. DebtCleanse Founder and CEO Jorge P. Newbery used these tactics to clear $26 million in debt for pennies on the dollar, including some individual debts for nothing at all.

Want to learn more? Join our email list to stay up to date with DebtCleanse’s efforts to combat America’s consumer debt crisis.

Tags: Student Debt

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