You know what happens if you default on your student loans—your credit history takes a hit. This can have serious consequences on your future financial prospects. Lenders are reluctant to approve loans to defaulters and even if they do, they will charge you premium interest rates. This is not a scenario that anyone wants to find themselves in. The only way to avoid it is to stay informed about how to prevent student loan default.
What is student loan default?
It’s important to understand the difference between defaulting on federal student loans vs private ones.
With federal student loans, when you miss a payment, the loan is considered to be delinquent. This comes into effect the immediately, the day after the missed due date. The loan then goes into default if the loan remains unpaid for the next 270 days. Federal lenders will report the delinquency to the credit bureaus after a student loan is delinquent for 90 days.
With private student loans, this generally differs from one lender to another so you have to make sure and ask. Many lenders treat the loan as delinquent the day after a missed due date. Reporting to the credit bureaus is at the private lender’s discretion. Some may defer it if you speak to them and explain your situation, but others may report it immediately.
When it comes to default, it’s better (and far less stressful) to take steps to prevent it rather than trying to get out of it. By then the damage is already done and it’s much harder to restore your creditworthiness.
What you can do in advance to prevent student loan default
You don’t have to wait till you are facing default to take preventive measures. There are things you can do in advance to minimize the risk of your loan getting into default.
Borrow only as much as you need
It’s tempting to borrow more than you need to cover all your costs. However, the problem is that you have to pay all that money back with interest. The more you borrow, the higher your monthly payments will be. If your income is not as high as you hoped it would be, you will find those high monthly repayments intense, increasing your risk of delinquency and default.
Look into potential salaries of your chosen field
Some professions have a lower earning potential as compared to others. Nothing wrong with choosing a lower-paying profession if that’s your passion, but you must also scale back accordingly.
Instead of choosing an expensive school and taking huge loans to cover the tuition, you may want to choose a more affordable school. With lower tuition fees, you can graduate with less debt. This will make your monthly payments more affordable thus reducing the risk of default.
Choose the autopay option
When you choose autopay, your monthly payments get debited from your bank account and transferred to the various lenders’ accounts automatically. This eliminates any possibility that you may forget about a payment or two and get into default unknowingly. As an added bonus, most lenders will give you a 0.25% reduction on the interest when you set up automatic payments.
What to do if you are facing student loan default
If, despite taking all the above measures, you still find yourself facing student loan default, you still have a few options available to you.
For private student loans, speak to your lender immediately. Most lenders will do their best to help you out.
For federal student loans, consider these options:
Change your repayment plan
Changing your repayment plan to one that lowers your monthly payment is the best way to make your payments more affordable and prevent default. Income-based repayments, graduated repayment, and extended repayments are three of the best repayment plan options for making your monthly payments more affordable.
- With an income-based repayment plan, your payments are calculated as a percentage of your income, after taking into consideration your monthly outgoings, so it’s never more than you can afford.
- A graduated repayment plan allows you to make smaller payments at the beginning. This amount increases progressively throughout the life of the loan.
- An extended repayment is another option that extends the repayment period, effectively lowering the monthly payments.
All three will increase your overall debt but they are effective solutions for preventing student loan default.
Refinance your student loans
When you refinance your loans, you combine some or all of your existing student loans into one new loan. Often when you refinance, you’ll get a lower interest rate. Your monthly payments are then recalculated on the refinanced loan, and with the new lower rate your monthly payments become lower too. You will only be able to refinance your student loans if you have managed to build your credit history or if you have a creditworthy cosigner.
You can refinance both federal and student loans. Before refinancing your federal student loans you must consider that you will lose access to all the benefits associated with them such as forgiveness and income-driven repayment plans.
Apply for deferment or forbearance
Deferment and forbearance will suspend your payments for a limited time while keeping your loan in good standing, but there are a few differences between the two.
Interest does not accrue during the period that your loan is deferred, but you must meet certain requirements to qualify for deferment.
There are no qualifying requirements to apply for forbearance but your loan will accrue interest during the forbearance period. It is still worth considering this option as it helps you prevent student loan default and helps you keep your loan and credit history in good standing.