How to Pay Back Student Loans If You Drop Out

Dropping out of school can have implications for student loan payments if you take out a loan when you start attending a higher education institution. The clock starts running on whatever grace period you have before payment must start if you fall under part-time registration. You take less than half of the full-time course load.

You must begin making federal student loan or private student loan payments when the grace period expires. Unfortunately, your debt doesn’t go away if you don’t get a degree.

The good news is that you can repay your student loans efficiently and effectively, even after dropping out of school, if you are proactive in planning your budget,

Key Takeaways

  • Most student loans offer a grace period after leaving school and before you are expected to start paying, although interest will accrue during this time.
  • Depending on your lender, you may have many options for repayment; Federal student loans have income-driven plans to help manage payments.
  • You may be able to refinance your student loan, but this is not always recommended as you will lose a lot of advantages when switching from a federal to private lender.
  • A deferral is a temporary suspension of payment, but its eligibility is limited; patience is easier to secure but the interest will add up.
  • The federal government halted student loan payments and interest accruals during the COVID-19 pandemic, with legislation to help borrowers underway.

What Happens to Student Loans When You Drop Out?

Some federal and private student loans offer a grace period before you are required to make payments. The countdown to your grace period begins if you drop out of school while you have student loans.

You have six months before payments begin for most federal loans, but it’s important to check with your lender to be sure. Interest continues to accrue during your grace period on all personal loans, as well as on most federal student loans except for subsidized direct loans.

Warning

Borrowers risk negative consequences on their credit scores if they don’t pay back the loans owed, leading to future financial hurdles when trying to buy a car or get a credit card.

Explore Your Payment Options

You have several options if you’re out and your grace period is about to expire, or if you want to get an early jump to paying off the loan before interest accrues on your balance.

Increase Your Earnings To Make Full Payments

Begin paying off your student loan debt as soon as possible after dropping out if you can afford to do so, even during the grace period. This will reduce your balance faster. You’ll also avoid accruing interest, which is a problem for anyone with a personal loan or a loan that isn’t set at 0%.

You may need to increase your income before you are able to make a full payment. There are many ways to do this, including asking for a promotion at your current job (if any), finding a new job and negotiating your salary, or looking for a side job. You can start paying as soon as you are no longer in school if your income is sufficient.

Tip

Talk to your lender about having payments automatically taken from your bank account on a regular basis, ensuring that you never miss a payment.

Sign Up for Income Based Payments

An income-based payment option may be right for you if you’re worried that you won’t have the money to make student loan payments after dropping out.

You will repay a certain amount of your loan each month based on your income and family size under an income-driven plan. The amount you’ll be paying may not be enough to fully cover interest and start reducing the balance, but the loan forgiveness option exists after a number of on-time payments.

Your monthly payments should be affordable with an income-based payment plan even if your job doesn’t pay much. Your monthly payments can be as low as $0 in some cases if your income is low enough.

Notes

Income-based payment options are only available for federal loans, not personal loans.

Consider Refinancing Private Student Loans

You may be able to reduce your payments through refinancing if you have private student loans. This will involve getting a new student loan from a private lender to pay off your existing debt. You can reduce your monthly payments if your new loan has lower interest payments, a longer repayment term, or both.

Refinancing a loan with a longer repayment term can increase your total interest cost, even if you reduce your interest rate. You will owe the lender interest for a longer period of time.

You must be able to prove through a good credit score and proof of income that you can repay your loan. This may be difficult if you have recently dropped out of school and are not making a lot of money. But it can help you get approved for a loan at a lower rate if you apply with a cosigner who has more income or a stronger credit history.

Warning

Refinancing is generally not a good idea for federal loans because it will require you to get a new loan from a private lender. That means giving up income-driven payment options, generous forbearance and deferral options, and other federal borrower benefits.

Explore Options for Procrastination or Patience

If you are facing financial difficulties, you can suspend your federal student loan for a short time. There are two options for waivers: procrastination and patience. Both allow you to stop making payments for a certain period of time.

Eligibility for suspension is limited. You must meet certain criteria, such as serving in active military service or participating in an internship or residency program related to your career.

Patience is the better option in most cases for those who know that their financial difficulties are temporary, even though interest will accrue. Procrastination can work well for individuals who have multiple subsidized student loans and wish to avoid accruing interest, or who are unsure how long their financial instability will last.

Many private lenders will also allow you to lend with patience, but it is best to discuss the rules and policies with your lender. They can vary depending on the organization.

Tip

Explore other payment plans before considering deferral or forbearance because of their impact on interest and potential loan forgiveness.

Impact of the COVID-19 Pandemic

According to the US Census Bureau, more than 16 million Americans canceled plans to attend classes at post-secondary institutions in the fall of 2020 as a direct result of the economic disruption and general fear surrounding the coronavirus pandemic.

The US Department of Education extended the student loan deferral period, which was originally in effect in March 2020, until January 31, 2022. Patience suspends collection activity and pauses interest accrual. This date was later extended to August 31, 2022. Contact your lender if you have not been notified by your lender of the change in deadline.

Individuals who have federal student loans are not expected to make payments. You can benefit from a 0% interest rate if you want to continue making payments. This reprieve only applies to federal student loans. Personal loan payments are not automatically paused, and interest will continue to accrue if you are in a grace period or have asked for patience.

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 the financial implications before you make a choice, including the challenges of increasing your earning potential without a degree.

You may want to talk to an academic advisor and financial aid advisor before you decide. They can help you explore your options and ensure that you make the decision that is best for you.

Frequently Asked Questions (FAQ)

Do I have to pay back my student loan if I drop out of school?

Yes. You are responsible for paying off any loans you take out for school, regardless of whether you end up using the money for this reason or not. If you have funds that have been disbursed to you personally for school-related expenses and you don’t plan to use them, you should pay them back immediately if you can to avoid earning interest. If you can’t afford to pay, check with your lender about grace periods and payment plans.

What happens if I don’t pay my student loan?

After one missed payment, your account is considered delinquent, and after several missed payments (or 270 days in arrears for Federal loans), you may reach default. This will hurt your credit score and may come with additional penalties and consequences.

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