You may hear a lot of news about the student loan crisis. This is when those students who have graduated from college learn that they have more money going out in student loan repayments than they are able to work into their budget. This imbalance may have come about due to a poor borrowing process during the college years, or unrealistic expectations about earning capabilities and money requirements after graduation.
Whatever the cause, many college grads find themselves struggling to repay their student loans. The result is that they don’t take any action or, even worse, they stop trying to make payments altogether. They go into a downward spiral where interest and late fees are added, making the problem even worse, or end up defaulting on their loan. For most federal student loans, you will default if you have not made a payment in more than 270 days.
If you default on a federal student loan, you lose eligibility to receive any further federal student aid and you may experience serious legal consequences. The federal government may attach your wages or withhold any federal income tax refunds. The entire unpaid balance of your loan and any interest you owe could become due immediately, and you may lose the opportunity to receive deferment or forbearance, or participate in alternate repayment plans. Your credit could also be affected so that you might have difficulty applying for car or home loans, credit cards, cell phone plans, and other activities which require credit approval. There are actions you can take when borrowing and after graduating to help avoid default.
Avoiding Student Loan Default After Graduation
You may be headed toward default if you find it harder to make monthly payments, but the best way to avoid this outcome is to be proactive. Ignoring the notices will not make the problem go away. Here are four important actions you can take to avoid student loan default:
1.Do Something: Open those letters or online notifications. Try to make a payment, even if it is less than the full amount. Even if you are delinquent on your loan, you may still be able to avoid default, so it is important that you contact your loan servicer This is the company that is handling the billing and servicing of your loan, and they can help guide you through the process.
2.Try an Alternative Payment Plan: Federal student loans have different payment plans available, but you have to ask to be eligible for one. You can reduce payment size, extend payment years, or utilize an income-based plan that is more realistic for your current financial situation.
3.Find Out if You Qualify for Deferment and Forbearance: These options allow you to temporarily stop making federal student loan payments or to temporarily reduce the amount you pay. If you have experienced a natural disaster, or are undergoing cancer treatment, you may also be eligible for repayment considerations.
4.Consider Simplifying Repayment with Consolidation: You might wish to combine multiple federal student loans into a single Direct Consolidation Loan to simplify repayment. There may be tradeoffs, so be sure you completely understand the advantages and potential disadvantages of consolidation before you apply.
Reducing Student Loan Default During Your College Years
The best way to minimize college debt is to minimize your borrowing during the college years. Try to maximize your use of financial aid and scholarships as much as possible to reduce out-of-pocket costs. Make sure to file the FAFSA each year you are in college. Other tips include:
• Borrow only what you need. Try to use student loan money only for education expenses, not living expenses.
• Utilize federal student loans before private student loans.
• Keep good records during your college years so you will know how much you are borrowing and how much your monthly payments will be.
• Read your loan agreements carefully, and have realistic expectations about your earning capacity after graduation.
For any private student loans you have, you need to talk to each of your lenders individually. Think of this as your first lesson in life-long money management.