How to Pay Back Student Loans if You Drop Out
According to the U.S. Census Bureau, more than 16 million Americans have abandoned plans to attend classes from a “post high school institution” this year, as a direct result of the economic disruption and general fear surrounding the coronavirus pandemic.
Whatever the reason, if you have started school and borrowed to attend, dropping out can have implications for student loan repayment. Specifically, if you drop below half-time enrollment—an enrollment status applied to those who only take part in half of the full-time course load—the clock begins to run on any grace period you have before student loan repayment must begin. And, once the grace period ends, you'll have to start making payments on federal student loans or private student loans, as your debt doesn’t disappear just because you didn't earn a degree.
If a borrower does not repay any loans owed, the individual risks negative consequences to their credit score, leading to financial roadblocks in the future, such as trying to buy a car or receive a credit card.
The good news is, if you’re proactive in creating a budget plan to better decide which approach is best for you, you can pay back your student loans efficiently and effectively, even after dropping out.
What Happens to Student Loans When You Drop Out?
When you drop out of school with student loans, the clock begins to tick on any grace period your loan may have. This is a period that some federal and private loans offer before you're required to make payments. For most federal loans, it's six months, however it’s important to check in with your lender to be sure. Plus, interest continues accruing during your grace period on all private loans, as well as on most federal student loans, except for subsidized direct loans.
As the coronavirus pandemic remains a national emergency, the U.S. Department of Education has extended its student loan forbearance period—initially instated in March, 2020—suspending collections activity, and pausing interest accrual, through Jan. 31, 2021. All individuals who have federal student loans will not be expected to make payments; however, you can continue to pay should you wish, benefitting from the 0% interest rate. This reprieve applies only to federal student loans. Private loan payments are not automatically paused, and if you're in a grace period or have requested forbearance, interest will continue accruing. If you have not yet been notified by your loan servicer of the deadline change, reach out to your lender.
Explore Your Repayment Options
If you've dropped out and your grace period is coming to an end, or you want to get a jump-start on repaying loans before interest accrues on your balance, you have some options. Here are four of them.
Increase Your Income to Make Full Payments
If you can afford to do so, you should start making payments on your student loan debt as soon as possible—even during the grace period—after dropping out, to more quickly reduce your balance. By doing so, you’ll also avoid accruing interest, which is an issue for anyone with private loans or loans that aren't set at 0%.
You may need to increase your income before you can afford to make full payments. There are many ways to do this, including asking for a promotion at your current workplace (if you have one), looking for a new job and negotiating your salary, or finding a side hustle. If you're able to make enough, you can start repayment right away, once you're no longer attending school.
Talk to your loan servicer to have payments automatically taken out of your bank account on a regular basis, ensuring that you never miss a payment.
Sign Up for Income-Driven Repayment
If you're concerned you won't have the money to make student loan payments after dropping out, income-driven payment options may be right for you.
Under an income-driven plan, you'll pay a set amount on your loans each month based on your earnings and family size. The amount you pay may not be enough to cover the interest in full and begin reducing the balance, but loan forgiveness options exist after a certain number of on-time payments.
With an income-driven repayment plan, your monthly payments should be affordable even if your job doesn't pay much. In some cases, if your income is low enough, your monthly payment could be as low as $0.
Income driven payment options are only available for federal loans, not private loans.
Consider Refinancing Private Student Loans
If you have private student loans, you may be able to reduce your payment through refinancing. Refinancing would involve getting a new student loan from a private lender that you use to repay existing debt. If your new loan has a lower interest payment, a longer repayment timeline, or both, you could drop your monthly payment. Refinancing to a loan with a longer repayment timeline could increase your total interest costs, even if you reduce your interest rate, since you would owe the lender interest for a longer period of time.
To refinance, you will need to prove that you can repay your loans through a good credit score and proof of income. This may be difficult if you've recently dropped out of school and aren't earning a lot of money. However, if you apply with a co-signer who has more income or a stronger credit history, this can help you get approved for a loan at a lower rate.
Refinancing generally isn't a good idea for federal loans because it would require you to get a new loan from a private lender. That would mean giving up income-driven payment options, generous forbearance and deferment options, and other federal borrower benefits.
Explore Options for Deferment or Forbearance
If you’re facing a financial hardship, it’s possible to suspend your federal student loans for a brief period. There are two options for finding relief: deferment and forbearance.
Both options allow you to stop making payments for a given amount of time.
Eligibility for deferment is limited and you must meet certain criteria, such as serving in active duty military service or participating in an internship or residency program related to your career. In most cases, for those who know their financial hardship is temporary, forbearance is the better option, though interest always accrues on loans in this state. Deferment, on the other hand, can work well for individuals who have some subsidized student loans and want to avoid interest accrual, or are unsure how long their financial instability will last.
Many private lenders also permit you to put loans into forbearance, but it’s best to discuss the rules and policies with your lender, as they vary depending on the organization.
Because of the impact on interest and potential loan forgiveness, explore another repayment plan prior to considering deferment or forbearance.
Consider Your Obligations Before You Drop Out
Deciding whether to drop out of school is a big decision and it's important to consider all of the financial implications before you make your choice, including the challenges of boosting your earning potential without a degree. Before you make your choice, you may want to talk with academic advisors and financial aid counselors to explore your options and ensure you're making the decision that's best for you.