Sometimes, life throws you a curveball, and if you’re in college when that happens, you might find yourself in the situation of having to drop out of school. In some situations, you may have no other choice while, other times, you’re weighing the pros and cons while deciding how to proceed. As part of your decision-making process, be sure to ask yourself the following question: “What happens to my student loans if I drop out?”
Reasons why people ultimately decide to drop out vary, ranging from students not being sure how to get enough funding to continue their educations, to those who are struggling with challenging family issues.
Others find college to be more stressful than they’d expected, while still others just aren’t sure what they want to major in and can’t justify the continuing expense. Not all students who drop out do so permanently, with some later attending a school that’s more suitable to what they need or returning after their personal challenges are resolved.
This post will walk you through the consequences of dropping out when you’ve already incurred debt, and also offer tips on how to manage outstanding student loan debt.
If You’re Still in School
If you’re currently facing challenges that are causing you to consider dropping out, here are a few ideas that could help keep you in school:
1. Talk to a counselor. Whether you have financial challenges or you’re struggling with another aspect of college, an experienced counselor may have a solution you haven’t even considered yet.
2. Decide to finish your current quarter or semester, no matter what other decisions you might make.
3. Stay in school, but cut back the number of hours you’re taking next quarter or semester, perhaps to the minimum you need to take and still receive your financial aid package. That way, you won’t have to make payments on your student loans until you graduate. As long as you stay in school with at least half-time enrollment, you don’t need to start paying back your federal student loans until you’ve completed school.
If you need to stop attending college, you may be able to request student loan exit counseling from the school, a service normally provided only to graduates. This could help you to understand more about your options for your student loan balances.
Managing Outstanding Student Loan Debt if You Drop Out
If you’ve taken out any federal student loans, regulations dictate that if you leave college or drop below half-time enrollment, you have to start paying back your student loans.
With federal loans you may have a grace period—which is generally six months after you leave school or drop below half-time enrollment—before you have to start paying back your loans. Remember that depending on which type of loan you have, interest may still be accruing during this grace period.
If you have taken out private student loans, it is important to check with your lender to determine when you need to start paying back your loans.
Wondering if you are able to get a tuition reimbursement if you drop out? Make sure to talk with the college or university you attended as each school generally has a different refund policy.
Debt Relief Options
If you’re leaving because, for example, you are undergoing cancer treatment or facing a financial emergency in your family, you can request a deferment or forbearance (respectively) on your federal student loans to give yourself time to address the qualifying emergency situation.
You can defer your federal student loans for up to three years, with the forbearance time period up to the loan servicer. Private lenders sometimes offer relief when you’re dealing with financial hardship, but they aren’t required to, so be sure to check with them.
Or, you could discuss a repayment plan based on your income , at least for federal loans. If you qualify, you can get any remaining balance forgiven after a period of 20 or 25 years, but you will have to pay taxes on the loan amount that was forgiven.
Note that, although deferment or forbearance gives you financial relief during a challenging period in your life, these plans will increase the amount of interest you’ll pay on the loans, overall, and can extend the length of the loans. And, typically, even if you declare bankruptcy, outstanding student loan balances are not discharged and there are no statutes of limitations to limit when the government can sue you to collect this money.
Although there are statutes of limitations on private loans, typically ranging from three to ten years (based upon the state), that only means there is a time frame in which they have the choice of suing you. After the statute of limitations ends on private loans, the lender does not have any legal recourse if you refuse to pay your debt (but it doesn’t mean you don’t have to repay your loan).
Paying off Your Student Loans
Here’s the bottom line: Once you leave school, you’ll no longer accrue any new student loan debt. So as soon as possible, it’s a good idea to begin to pay them off as quickly as you can, paying more than the minimum payment any time you can. Before paying ahead, though, check to see if any of your student loans have a prepayment penalty. If they do, paying early can cost you money.
It’s crucial you make all student loan payments on time. Consequences of making delinquent payments vary by lender, but you can usually expect to be charged late fees and, if your payment is 30 or more days later, you may have negative information placed on your credit report.
And if you miss making payments on your federal student loans for 270 days, your federal loans go from being considered delinquent to being in default—and when that happens, the balance is due in full, the amount of which can include accrued interest, collection agency fees, and any other fines, fees, and penalties.
The three-year default rate as of 2018 is 10.8%, up from the previous year’s rate of 11.3%.
And although percentages give us some indication of the depth of the problem, seeing raw numbers can be even more startling. Nearly five million Americans have defaulted on student loans, with at least one report showing that 3,000 additional borrowers are defaulting every single day.
To get the money owed to them, the government can garnish paychecks of defaulters, up to 15% of wages after deductions. They can also take any tax refund owed to them and apply it to outstanding balances. If you have a co-signer, they can do the same for him or her.
Plus, they can sue you, which may make you responsible for court fees. Defaulting may really wreck your credit as well, making it challenging for you to obtain a mortgage loan or car loan, get a credit card—or even get homeowners insurance or have your utilities turned on.
And, while you’re still able to make your student loan payments and your credit is still good, you may want to consider refinancing your student loans. By combining them into one payment, you can also choose the maximum term, which will provide you with the lowest monthly payment possible.
Then, as your financial situation improves, you can make additional payments (as long as you refinance with a company that doesn’t charge a prepayment penalty) and/or refinance your loans with a term that could accelerate payoff and allow you to pay less interest over the lifetime of the loan. Here’s more information about refinancing.
Refinancing Student Loans
It isn’t unusual for students to have taken out multiple loans for their education, with four being the average. To streamline repayment, you can consolidate and refinance them into one convenient payment—and at SoFi, you can get a (hopefully) lower interest loan when you refinance, possibly saving thousands of dollars over the life of your loan.
Although some lenders won’t allow you to consolidate and refinance federal and private loans, SoFi does. You can choose between fixed and variable rates and select your term from multiple options, which is how you can decide if you want to save on total interest paid on your student loans or save on your monthly payment.
There are no prepayment penalties and no hidden fees. If that sounds good to you, you can find out your rate online in just two minutes.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.