When you owe tens of thousands in student loans, it may feel like the odds of ever paying it back are slim to none. In moments of desperation, it's easy to get lost in the comfort of a far-fetched strategy. It may be tempting to stop paying altogether. But the truth is, getting your student loans written off isn’t the magic solution you are expecting—here’s why.
What does “written off” actually mean?
The terms "written off" or "charged off" are used to describe the status of your debt. When you are delinquent enough on an account, your lender may actually give up on trying to get the money. At that point, they remove it from their books and they mark the loss as bad debt.
As far as your credit reports go, written off debt means the original account is no longer active. It's possible you will see the words "paid" or "closed" in your credit reports, and they mean the same thing.
While it may be a relief to be free from your original lender, written off debt has a major negative impact on your credit score. Because charge-offs stick around for seven years, your credit score won’t recover anytime soon. To make matters worse, the debt isn’t completely gone—and you may have a new company to wrestle with.
Often, your lender transfers or sells the bad debt to a collections agency. They pay pennies on the dollar for your debt. Then, the agency tries to get back as much as they can from you—through whatever means they can.
Once your debt is in the hands of a collections agency, you may see a new line on your credit report. It may say "transferred from..." and include your original lender's name. Luckily, the transfer itself won't add to your blemished score.
The bottom line is this—you still owe the debt unless: 1) you settle with the debt collector or 2) the statute of limitations on the debt passes.
So what about your student loans?
Which type of loan: federal or private?
When it comes to your student loans, charge-offs may be treated a little differently. Before crafting your plan of action, you need to identify which type of loans you are dealing with.
You can log in to the National Student Loan Data System (NSLDS) to see a list of your federal loans. Your credit reports should include your private loan activity. You can pull a free report from each of the three bureaus—Experian, Equifax, and TransUnion—once a year for free at AnnualCreditReport.com.
Federal student loans
If you find yourself in federal student loan default, the entire balance—principal and interest—may be due immediately. This is called acceleration. If you don't work out a repayment plan and stick to it, the loan may end up with a collections agency.
The Department of Education contracts private collections agencies to do the heavy lifting for them. These agencies will attempt to collect your unpaid balance—and may tack on extra for the cost of their efforts.
If your loan goes to one of these agencies, the first thing you will see is a voluntary repayment agreement offer. If you don't accept the agreement—or fail to follow it—they may garnish your wages.
Wage garnishment is when your employer withholds part of your paycheck to pay off your debt. It can be up to 15 percent of your disposable pay—or your take-home pay after deductions—and it happens without going to court.
It gets particularly dicey when you don't receive a regular paycheck. If the Department of Education can't easily withhold part of your income, you could face legal action. If it escalates, you may even get sued by the Department of Justice.
Private student loans
The sneaky thing about private student loans is every lender views default differently. As a general rule, if you don't pay for three months, your loan will go into default—but it could happen after the first missed payment. If you aren’t there yet, take a few minutes to review your loan agreement. It should spell out what you can expect.
Like federal loans, if you default, they may end up with a collections agency. At this stage, you will likely have three options: 1) pay off your total balance, 2) negotiate a payment plan, or 3) settle for less.
One downside of private loans is they don’t have to offer any type of “get out of default” program. But the they have fewer ways to collect if you do. They can’t garnish your wages without taking you to court. If they decide to take these steps, a judgement must be ruled against you to collect.
Getting your loans written off isn’t the answer
When you are drowning in debt, getting loans written off may feel like a dream come true. The problem is the debt doesn't actually go away. And worse, the charge-off can destroy your credit for years to come. If you are in default—or close to it—the best thing you can do is talk to your lender. By starting the conversation now, you are one step closer to finding a solution.