Sometimes, life throws you a curveball. If you’re in college when that happens, you might find yourself dropping out of school. In some situations, you may have no other choice. At other times, you can weigh the pros and cons while deciding how to proceed.
What happens to student loans if you withdraw isn’t widely discussed. We’ll walk you through the consequences of dropping out when you’ve already incurred debt, and show you ways to pay off outstanding student loans.
Do I Have To Pay Back My Student Loans If I Drop Out of School?
Regulations dictate that if you leave college or drop below half-time enrollment, you have to start paying back your federal student loans. You may have a grace period — generally six months — before your first payment is due. Just know that interest can accrue during the grace period.
If you have private student loans, check with your lender to determine when you need to start paying back your loans.
If you’re currently still in school or left very recently, you may be able to request student loan exit counseling from your school, a service normally provided only to graduates. This can help you understand your options, including potential tuition reimbursement. Each school has a different refund policy.
What Happens If I Don’t Pay My Student Loans?
The consequences of late or “delinquent” payments vary by lender, but you can expect to be charged late fees. If a payment is 30 days or more late, that information can be reported to one of the three credit bureaus, which will negatively affect your credit score.
And if you stop paying your student loans for 270 days (about 9 months), your federal loans go from being delinquent to in default. When that happens, the balance is due in full, including accrued interest, collection agency fees, and any other fines, fees, and penalties. Student loans generally cannot be discharged during bankruptcy.
The government can go to great lengths to get their money back, including:
• Garnishing the paycheck of defaulters, up to 15% of wages after deductions
• Hijacking their tax refund
• Going after their co-signers paycheck and tax refund
• Suing the defaulter — and make them responsible for court fees
Private student loans generally go into default after 90 days. Private lenders may also take you to a court or use collection agencies to recoup student loan debt. Defaulting can wreck your credit, making it challenging for you to obtain a mortgage loan, car loan, credit card, homeowners insurance, or new utilities.
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Way To Pay Off Student Loans If You Didn’t Finish School
Once you leave school, it’s a good idea to begin paying off your loans as quickly as you can, paying more than the minimum payment whenever possible. Before paying ahead, though, check to see if any of your student loans have a prepayment penalty. If so, paying early can cost you money.
Should you refinance your student loans? What about income-driven repayment programs? Below are the best options to help ease financial hardship and avoid default.
Income-Driven Repayment Plans
Income-driven repayment plans base your monthly payment on discretionary income and family size. The plans lower monthly payments by extending the length of the repayment period to 20 or 25 years. After that, any remaining loan balance is to be forgiven, though you’ll have to pay taxes on the forgiven amount.
The government offers four income-driven options:
• Income-Contingent Repayment (ICR)
• Income-Based Repayment (IBR)
• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
Enrolling in an income-driven repayment plan won’t have a negative impact on your credit score or history. However, income-driven plans aren’t always the lowest monthly payment option. And even when monthly payments are lower, you will pay more interest over time (longer loan terms mean more interest payments).
Borrowers must recertify their income each year. If they fail to do so, they’ll be returned to the standard 10-year amortizing plan.
Students who are enrolled at least half-time in an eligible college or career program may qualify for an in-school deferment. This type of deferment is generally automatic. If you find the automatic in-school deferment doesn’t kick in, you can file an in-school deferment request form.
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Refinancing Student Loans
While you’re still able to make your student loan payments and your credit is still good, consider refinancing. You can combine multiple loans into one payment and choose the payback timeline that will give you the lowest monthly payment possible. You can check the interest rate and terms you qualify for by using SoFi’s student loan refinance calculator.
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) or refinance again with a new term that will accelerate payoff and allow you to pay less interest over the lifetime of the loan. You can learn all the ins and outs of that path with this handy student loan refinancing guide.
It’s important to note that by refinancing your federal student loans, you will not be able to access federal programs like income-driven repayment plans, Public Service Loan Forgiveness (PSLF), and government deferment or forbearance. Without a degree, you won’t qualify for Biden’s student loan forgiveness plan, but you can still qualify for PSLF. If you don’t need any of those benefits, a lower student loan interest rate gained by refinancing could be worthwhile.
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What To Do If You Can’t Afford Any Student Loan Payments
If you’re leaving school because, for example, you are undergoing cancer treatment or facing a financial emergency in your family, you can request a deferment or forbearance on your federal student loans to give yourself time to address the situation.
Although deferment or forbearance can give you short-term financial relief, these plans will increase the amount of interest you’ll pay on the loans overall, and can extend the length of the loans.
Student Loan Deferment
Student loan deferment allows eligible borrowers to temporarily reduce loan payments or pause them for up to three years, depending on the type of loan. In most cases, borrowers seeking a deferment will need to provide their loan servicer with documentation that supports their eligibility.
Deferments are typically broken down into qualifying categories:
• Unemployment. Borrowers receiving unemployment benefits or who are actively seeking and unable to find full-time work may qualify. This deferment is good for up to three years.
• Economic Hardship. Individuals receiving merit-tested benefits like welfare, who work full-time but earn less than 150% of the poverty guidelines for their state of residence and family size, or who are serving in the Peace Corps may qualify. This deferment may be awarded for up to three years.
• Military Service. Members of the U.S. military who are serving active duty may qualify. After a period of active duty service, there is a grace period of 13-months in which borrowers may also qualify for federal student loan deferment.
• Cancer Treatment. Borrowers who are undergoing treatment for cancer may qualify. There is a grace period of six months following the end of treatment.
Student Loan Forbearance
There are two types of federal student loan forbearance: general and mandatory. Private lenders sometimes offer relief when you’re dealing with financial hardship, but they aren’t required to, so check your loan terms.
General forbearance is sometimes called discretionary forbearance. That means the servicer decides whether or not to grant your request. People can apply for general forbearance if they’re experiencing financial problems, medical expenses, or employment changes.
General forbearance is only available for certain student loan programs, and is granted for up to 12 months at a time. At that point, you are able to reapply if you’re still experiencing difficulty.
Mandatory forbearance means your servicer is required to grant it under certain circumstances. The Federal Student Aid website has a full list of criteria for mandatory forbearance. Reasons include:
• Medical residency or dental internship
• Participating in AmeriCorps
• Teachers who qualify for teacher student loan forgiveness
• National Guard duty
• Monthly student loan payments that are 20% or more of your gross income
Similar to general forbearance, mandatory forbearance is granted for up to 12-month periods, and you can reapply after that time. You still have to pay interest on all types of federal loans while they’re in forbearance.
If you’re pursuing federal student loan forgiveness, any period of forbearance probably will not count toward your forgiveness requirements.
Should you unexpectedly need to drop out of school, you’ll still be responsible for paying back your student loans. If you’re able to work, you may want to enroll in an income-driven repayment plan — though keep in mind that these programs don’t always offer the lowest monthly payment possible.
If you are unable to work, see if you’re eligible for student loan deferment or forbearance. Finally, if you have a strong credit history, refinancing your student loans may save you money on interest while lowering your monthly payment. Just be aware that refinancing federal loans means losing access to federal protections and PSLF loan forgiveness.
Refinancing student loans with SoFi allows you to consolidate both federal and private loans. You can choose between fixed and variable rates, and select your payback term from multiple options. There are no prepayment penalties and no hidden fees. And you can find out your rate online.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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