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Updated on Friday, December 7, 2018
About 40% of college students who borrowed money for their education considered quitting school, according to a MagnifyMoney survey.
If you’ve also thought of leaving — or have already stepped off campus — you might be wondering: What happens to student loans when you drop out of college?
Here’s what you need to know to ensure you get rid of your debt, even if you don’t graduate.
What happens to student loans when you drop out?
Unfortunately, the student loans won’t just disappear. The main exception is if you leave school and cancel your federal debt within 120 days of the loan’s disbursement. In that case, your school would return the balance to your servicer, and you’d be off the hook for repayment, fees and interest.
Similarly, with private loans, you could return some or all of the balance as soon as you decide to leave school. If you borrowed from Sallie Mae, for example, you could forward your school’s tuition refund check back to the lender to ease your repayment.
Be aware, though, that your lender might have already imposed interest, leaving you with a larger amount to repay than what you borrowed.
It’s also possible that your school already cashed the funds from your loan, making the refund process more difficult. Check with your campus financial aid office as soon as you plan to withdraw to learn about its tuition refund deadlines.
If you’re departing school with federal or private student loans to repay, rest assured that your grace period is likely protected. Certainly with federal loans, as well as with some private lenders, your servicers won’t send your first bill until after the six-month grace period has ended. But note that the clock starts ticking as soon you officially tell your school registrar that you’re withdrawing.
When the six months are up, your servicer will provide:
- A repayment schedule, including the first payment due date
- The number and frequency of payments
- The amount of each payment
By checking with your financial aid office, you’ll learn about the exit counseling requirement for your federal loans. The program teaches you about how to handle your loan repayment once you’re off campus. You’ll also learn about your ability to change repayment plans, for example.
Opening up dialogues with your school’s financial aid office and loan servicer are the critical first steps if you feel lost. You’re best served, however, by doing your research. Federal loan servicers, for example, might not have the time or resources to walk you through all your loan repayment options.
There’s no such thing as exit counseling for private loans, so it’s wise to take your loan repayment by the reins and contact your lender as soon as possible.
5 key tips if you drop out with student loan debt
Without a diploma — and perhaps no strong job prospects — your student loan debt could feel like an impossible challenge. It doesn’t have to be.
Consider these five tips for handling your loan repayment.
1. Use your grace period wisely
If you recently left school, you might be tempted to put your loan repayment on the back burner until you receive your first bill in the mail. But by getting a head start, you could ease your eventual repayment.
Use your six-month period to contact your federal loan servicer via the National Student Loan Data System, as well as sync up with your private lender if you have one. Start a conversation about where you stand with your debt.
If you use this time to educate yourself on the ins and outs of loan repayment, you won’t be as stressed when your first due date approaches.
Keep in mind that for federal and private loans, you may only receive one grace period. In the case of federal loans, if you return to school more than six months after leaving, you won’t have another six-month grace period on which to fall back.
2. Adjust your repayment plan, if necessary
With your private student loans, you’re likely stuck with the repayment plan to which you agreed.
But federal loans come with the ability to alter your repayment plan.
Without a degree and, perhaps, lacking a sizable paycheck, you might benefit from one of the government’s income-driven repayment plans. You could lower your monthly payments to a percentage of your income until you can pay more.
Remember that whenever you lower your monthly payment, you’re also lengthening your repayment and making it more expensive.
Say you have $15,000 in federal loans on a standard 10-year repayment plan and are repaying the balance, plus 5.70% in interest. By switching to a 20-year income-based repayment plan, for example, your monthly payment could fall from $164 to $58. The bad news is that in this scenario, you’d owe $5,518 more in interest over the life of your loan.
You might still want to focus on lower monthly payments over long-term savings, but use Federal Student Aid’s Repayment Estimator to ensure you choose the right repayment plan for your situation.
3. Explore your deferment and forbearance options
While you were enrolled, your federal and private student loans were effectively deferred — that is, you were excused from making payments as long as you kept going to class.
Now that you’re off campus (or considering leaving), it’s worth investigating ways to pause your loan repayment.
For federal loans, there are many ways to defer payments, including if you:
- Take part in a rehabilitation training program
- Are unemployed and unable to find work
- Experience an economic hardship
- Serve in the military
- Return to school
Private lenders might offer the more limited option of forbearance, rather than deferment. With this, you could be able to pause your repayment for months due to a job loss or other financial struggle. Be prepared to provide evidence that your hardship has made it difficult to keep pace with loan payments.
4. Increase (and keep more of) your income
Maybe you’ve already given yourself some breathing room by switching to an income-driven repayment plan or securing a deferment or forbearance for your loans.
To give yourself an even better chance to get out from under your debt, come up with ways to increase your income — and keep more of it.
Perhaps your job options are limited without a degree in hand. You could still leverage the skills you picked up in college, however, to start making some money. If you’re a former journalism student, for example, you might try to be a freelance writer. And you could always supplement this with a side gig, too.
As soon as you’ve developed at least one income stream, make sure it’s not going to waste. Start by budgeting your expenses, line by line. This way, you might find some trimmable costs or room to make extra-large student loan payments.
5. Consider refinancing your student loans
Keeping up with on-time loan payments and increasing your income will make you a more attractive candidate for student loan refinancing.
Through refinancing your college debt, you could lower your interest rate, potentially saving significantly in interest payments. You could also choose a friendlier lender and consolidate your loans into one account if you’re looking to simplify your repayment.
Refinancing without a bachelor’s degree is possible, though not with every lender. Some will insist on you being a graduate, but others just want to know you’re a creditworthy borrower.
At Citizens Bank, for example, you’re eligible to refinance without a degree. But you must make 12 on-time payments toward your loans before applying.
Before you decide to refinance, however, be certain that you won’t miss any features of your federal loans. Only federal student debt comes with access to income-driven repayment and some types of deferment, not to mention loan forgiveness.
Whatever your decision, you can learn more through our complete guide to student loan repayment.