Those in a financial bind have to make hard decisions about who to pay when there isn’t enough to pay everyone. The most aggressive creditors, the credit card companies, have the lowest priority in my view of who should get paid. Shorting your obligations for housing, car payments, taxes and student loans all have far larger and more immediate consequences for non payment than unsecured credit card debt.
Student loans? you say. It’s tempting to put repaying student loans on a back burner. The availability of deferments suggests that regular payment on student loans may not be all that important. Consider that unpaid interest on student loans is added to principle, so that you incur interest on last month’s unpaid interest in the following month. You don’t need to have been a math major to understand how expensive compound interest gets over time.
A less well known consequence of not paying on student loans is that any hope of discharging student loans in bankruptcy requires that the borrower have made a good faith attempt to repay the loan before seeking its discharge.
Courts have found that borrowers otherwise eligible for the discharge of their student loans in bankruptcy are barred from relief because they paid other debt instead of their student loans. Paying the squeaking creditor rather than the student loan had enormous and unanticipated consequences. Borrower beware.
