September is here, which means a new school year is getting underway. Even if you’re not heading back to college this fall, you may still be paying for it. In fact, if you recently graduated, you may not have even started dealing with your biggest education expense yet – your student loans.
Many borrowers are still a couple months away from their loans entering repayment. However, when this occurs, you want to start on the right path, because entering the wrong one could lead to student loan default.
Defaulting on a student loan is one of the worst financial mistakes you can make. On its own, default takes a bite out of your bank account through additional fees and collection practices, including wage garnishment and tax refund seizure. Default also affects your credit, which can make it tougher for you to lease a car, buy a home or even get a job.
Despite such consequences, there are currently 6.8 million borrowers in default, according to the most recent data from the U.S. Department of Education. Default happens for a number of reasons. By understanding four of the biggest warning signs behind them, you can prevent default from affecting you.
- You don’t know when your first payment is due: It’s not surprising if you largely ignored your student loans for the past four years. When it comes to repaying them, though, it’s time to pay attention.
If you borrowed student loans, you are responsible for knowing when your payments begin, how much they are and where to send them, even if you don’t receive any notices with these details.
You can log on to your loan holder’s website to find out when payments are due. If you’re not sure who that is either, check the National Student Loan Data System. This database covers everything about your federal student loans.
Once you find who your loan servicers are, contact them to make that first payment on time and set yourself up for success thereafter. If you have private loans, you’ll have to check your credit report to find out who the lender is.
- You dropped some classes or dropped out of school: One common reason why some borrowers don’t know when their first payment is due is that they didn’t realize their repayment grace period was already winding down.
For federal student loans, the grace period kicks in when students drop below half-time enrollment. Half-time enrollment is defined differently from school to school. If you’re not taking a full course load, ask your financial aid office to ensure repayment isn’t creeping up on you.
Of course, if you’ve left school altogether, you certainly dropped below half-time enrollment. Even if you don’t complete your education, you are still required to repay any loans you borrowed.
- You can’t afford your payments: The student loan grace period gives borrowers some time to figure things out before repayment begins.
However, after that time, you may still be looking for work or barely able to cover your living expenses, let alone expensive loan payments. In situations like these, some people ignore their loans until they can pay them. This is the last thing you want to do.
Instead, talk with your loan holder about your different options. If you borrowed federal student loans, you may be able to select a payment plan that decreases the amount you pay each month, perhaps
based on how much money you make. You may also be able to temporarily postpone your payments, with a deferment or forbearance.
Decreasing or pausing your payments may increase the amount you repay overall. Still, that’s better than letting your loan default, which will definitely add to what you owe.
- You think you already defaulted: Borrowers often confuse delinquency and default. If you miss a few payments, your loan is likely delinquent, not in default, and you can still do things to avoid the consequences listed above.
You may think you defaulted because you’re receiving late notices and calls from your Study loan holder. Instead of hoping they go away, talk to these people about your options. Believe it or not, they want to help you.
If you have defaulted, don’t give up. You can pull your loan into good standing by paying it in full, consolidating it or through rehabilitation. Fees remain for each option, but vary between them. In addition, upon completion of rehabilitation, the default entry gets removed from your credit history.
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