If you’re struggling to make student loan payments after dropping out of your degree program, it’s important to understand your options. Student loan forgiveness, deferment, forbearance, income-based repayment, and other programs can be confusing. This article offers a basic overview to help you get started.
Student loan debt is a problem for millions of Americans. Loan payments can be overwhelming even for college graduates working in their fields. If you drop out, you often get the worst of both worlds. You don’t have the college degree to help you get a higher-paying job and you’re still stuck with the burden of making monthly payments. If you’re struggling to make student loan payments after dropping out of your degree program, it’s important to understand your options. Student loan forgiveness, deferment, forbearance, income-based repayment, and other programs can be confusing. This article offers a basic overview to help you get started.
Student Loan Debt When You Drop Out or Drop Below Half-time Enrollment
With most loans, repayment obligations kick in shortly after you borrow money. Federal student loans - and some other student loans - are different. Students still in school don’t have to make payments on their federal loans as long as they’re enrolled at least half-time. When the student graduates, drops out, or drops below half-time, the countdown to repayment begins.
Whether you’ll be held responsible for any interest that accrues while you’re in school depends on the type of loan you have. If you are responsible for interest that accrues on a federal student loan while you’re enrolled at least half-time, you’ll have the option of making payments as you go or holding off until you enter repayment. Delaying interest payments reduces the financial burden while you’re in school, but will mean you graduate with a higher loan balance.
By default, payments on federal parent PLUS loans begin shortly after the loan is disbursed, while the student is in school. The parent borrower can delay repayment by requesting a deferment. The deferment postpones repayment as long as the student is enrolled at least half-time, and for six months after the student graduates, leaves school, or drops below half-time enrollment.
Private student loans are a bit different from federal loans. One important difference between them is when repayment terms begin. Some allow the borrower to put off payments until after graduation. Others start right away.
Private student loans don’t offer the same range of repayment options, either. Federal student loan borrowers can consolidate loans. They may be able to put payments on hold under some circumstances. And, many qualify for income-based repayment plans. Private student loans operate more like traditional credit does. Options are generally much more limited. And, when you refinance federal student loan debt into a private student loan, you’ll lose many options and protections. So, you should carefully consider the pros and cons of this option before committing to it.
Leaving school, either pre-graduation or as a new college graduate, triggers federal student loan repayment. But, payments usually aren’t due right away. Most federal student loans have a built-in grace period. The grace period is a gap between the time you leave school and the time mandatory repayment starts.
For most federal student loans, the grace period is six months. But, there are exceptions. For instance, federal Perkins loans have a nine-month grace period. Private student loans may or may not offer a grace period.
It’s nice not to have to start making payments right away. The grace period gives you time to start earning money. But, your loan will be accruing interest during that time. Typically, this interest is added to the loan balance. When you start making payments after six or nine months, you’ll owe more than you did when you left school. Or, you can choose to pay the interest during the grace period, which will save you money over time.
Deferment and Forbearance
Ideally, the grace period allows enough time for the borrower to start earning money. But, it doesn’t always work out that way. Repayment can be especially difficult for those who leave school without a degree. It can be tough to quickly find a job that pays enough to cover living expenses and student loan payments.
Deferment and forbearance are two possible options for federal student loan borrowers who leave school and can’t pay their loan obligations right away.
Student Loan Deferment
A student loan deferment temporarily relieves a borrower from the burden of making monthly payments. Economic hardship is one reason student loans may be deferred. But, there are other reasons. For instance, if you drop out and then later go back to school, your payment can be deferred while you’re in school at least half-time.
Usually, you’re not responsible for interest payments when a federal loan is deferred. But, it depends on the type of loan you have. If you do have to pay interest, you have a choice. You can make monthly payments or add the interest to your loan balance. Deferment opportunities are limited, but can provide a good short-term solution if you can’t make payments right now.
Student Loan Forbearance
A forbearance is similar to a deferment. But, there are some important differences. First, you will be held responsible for interest accrued during the forbearance period. You can pay as you go or add to your loan balance. But, if you add the interest to your loan balance, your monthly payments may increase and you’ll owe more over time.
General forbearances are discretionary. That means you can apply for a forbearance, but it’s up to the servicer whether or not to grant the forbearance. The most common reasons for this type of forbearance are financial hardships. That could mean a loss of income, large medical expenses, or anything your student loan servicer thinks is a good reason.
A general forbearance may be for just a couple of months, or for up to 12 months. If you’re still having trouble at the end of your forbearance period, you can request another forbearance. But, you won’t be granted a forbearance beyond three years (cumulatively) for federal loans. Private lenders may or may not offer forbearance and deferment options. If they do offer them, they will set their own terms.
Mandatory forbearances are different. If you are eligible, your servicer must grant the forbearance. Some examples include:
A borrower serving in an AmeriCorps position who has received a national service award
A member of the National Guard who has been activated by the governor
A borrower whose student loan payment is 20% or more of their monthly gross income
There’s also a third type of forbearance that doesn’t come up often. During the coronavirus pandemic, federal student loans were placed on administrative forbearance. This is a type of mandatory forbearance that was automatically applied to all eligible federal loans.
Student Loan Repayment Plans
Grace periods, deferments, and forbearances all allow some breathing room. If you’ve recently dropped out of school, the grace period before repayment kicks in will give you a chance to start earning money to cover your loan payments reliably. If the grace period isn’t long enough to get you on your feet after leaving school or you run into trouble later, a deferment or forbearance can give you another break. But, all of these solutions are temporary.
For low-income borrowers or those with large loan balances, a longer-term solution may be necessary. Fortunately, there are many options for managing student loans successfully.
Standard and Graduated Student Loan Repayment Plans
The standard repayment plan for most federal student loans is typically more expensive in the short term than some other options. But, there’s an upside. The higher monthly payments allow you to pay off your loan faster. And, a shorter repayment period means less interest accrued. That means the total amount you’ll pay the lender overall is lower. If you don’t opt for another type of repayment plan, your loan servicer will put you in a standard repayment plan.
You may also choose a graduated repayment plan. Under the graduated plan, you’ll make lower payments in the beginning. Your monthly payment amount will increase every two years. This gradual stepping up allows you to make lower payments while you’re building your career and pay more later, when you’re earning more. This plan is more expensive over time, since you’ll pay down the principal more slowly and accrue more interest than you would under a standard plan.
Both the standard and graduated plans require total repayment within 10 years. Some borrowers with loan balances of more than $30,000 can choose an extended repayment plan. The extended repayment plan allows 25 years to repay student loans. Stretching payments out across 25 years lowers payments, but it also means you’ll pay more in interest. Depending on the interest rate, the difference in the total amount of interest you pay can be significant.
Income-Driven Repayment Options
Another alternative for low earners or those with relatively high student loan debt is income-driven repayment. The Department of Education has reconfigured income-based options over time. Currently, there are four income-driven options. They are:
REPAYE (Revised Pay as You Earn Repayment) Plan: Monthly payments are 10% of discretionary income over 20 or 25 years. At the end of the repayment period, any remaining balance is forgiven. You may have to pay income tax on the amount forgiven.
PAYE (Pay as You Earn Repayment) Plan: Monthly payments are no more than 10% of discretionary income, and are never more than you’d pay in a standard repayment plan. Any remaining balance is forgiven after 20 years but you may have to pay income tax on the amount forgiven.
IBR (Income-Based Repayment) Plan: Monthly payments are 10% or 15% of discretionary income, across 20 or 25 years. Payments will never be more than your standard repayment amount would have been. Any remaining balance at the end of the repayment period is forgiven, but you may be taxed on that amount.
ICR (Income-Contingent Repayment) Plan: Payments are the lesser of 20% of your discretionary income or a fixed amount based on a 12-year repayment plan. Any outstanding balance is forgiven after 25 years, but you may have to pay income tax on the amount forgiven.
These plans are similar to one another. But, there are important differences. One is that not all loan types are eligible for all plans. Your student loan servicer can tell you more about your options based on the type of loan you have, when you borrowed the money, and other factors.
Most income-driven repayment plans cost more in the long run than making payments under a standard plan. But, they can provide a solution for both those who leave school early and graduates who can’t afford the standard repayment plan. Income-driven repayment can also be a good option if you’re working toward loan forgiveness. An income-based plan can keep payments low until you qualify for forgiveness.
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Federal Student Loan Forgiveness Programs
The Department of Education offers a variety of student loan forgiveness programs. Most people are generally aware of these programs. But, you may not know that you don’t necessarily have to graduate to qualify for loan forgiveness.
Public Service Loan Forgiveness
Public Service Loan Forgiveness (PSLF) is probably the best known forgiveness program. It’s also often the most accessible for student loan borrowers who did not finish college. Qualifying for PSLF is based on the organization you work for, not the specific job you do. Generally, any full-time work with a governmental agency or 501(c)(3) non-profit qualifies. You may also be able to combine qualifying part-time jobs to meet the full-time requirement.
Other Forgiveness Programs and Related Solutions
There’s some confusion about similar but different programs for eliminating student loan debt. There are other loan forgiveness programs specific to professions and types of service, such as a special program for teachers. But, forgiveness is just one option. Student loan cancellation and discharge both free you from repaying part or all of your student loan debt. But, they’re separate options with separate requirements. Be sure to explore all of your options before committing to a plan of action.
Figure Out if You Qualify Now
Loan forgiveness programs typically require 10 years of qualifying payments, and you’re required to submit information and documentation along the way. So, it’s important to research your options and plan when you’re leaving school, or as soon as possible after.
Too often, borrowers wait until they’re struggling with student loan payments to explore their options. But, most programs aren’t available if you’re already in default. You may also lose opportunities for forgiveness, income-based repayment, deferment, forbearance, cancellation, or discharge if you refinance your loans with a private lender.
You can get more information about your options by contacting your student loan servicer. The Department of Education also provides extensive information about student loan forgiveness programs on its website at StudentAid.gov.
Don’t Default on Your Loan Payments
Defaulting on a student loan is serious business. Default can cut off options that might have made student debt manageable. Worse, the federal government’s collection powers are significant. Before it can pursue aggressive collections enforcement measures, a credit card issuer or other creditor typically has to:
File a lawsuit against you,
Prove its case,
Get a judgment, and
Request wage garnishment or other collection action.
But, the government can garnish your wages, seize your income tax refund, and take other collection action without any court proceeding if you default on your loan(s).
Contact your student loan servicer to discuss your options as soon as you run into trouble making your payments to avoid default.
Student loan repayment can be especially challenging for borrowers who drop out without completing a degree. It can be tough to make enough money to cover student loan payments on top of living expenses. Fortunately, you have options, from short-term deferment or forbearance to income-based repayment plans. If you default on your loans, you lose some of those options. Don’t wait until you’ve fallen seriously behind on your loan payments to look for solutions.