September is here, which means a new school year is getting
underway. Even if you’re not heading back to college this fall, you may still
be paying for it. In fact, if you recently graduated, you may not have even
started dealing with your biggest education expense yet – your student loans.
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Many borrowers are still a couple months away from their
loans entering repayment. However, when this occurs, you want to start on the
right path, because entering the wrong one could lead to student loan default.
Defaulting on a student loan is one of the worst financial
mistakes you can make. On its own, default takes a bite out of your bank
account through additional fees and collection practices, including wage garnishment
and tax refund seizure. Default also affects your credit, which can make it
tougher for you to lease a car, buy a home or even get a job.
Despite such consequences, there are currently 6.8 million
borrowers in default, according to the most recent data from the U.S.
Department of Education. Default happens for a number of reasons. By
understanding four of the biggest warning signs behind them, you can prevent
default from affecting you.
1. You don’t know when your first payment is due: It’s not surprising
if you largely ignored your student loans for the past four years. When it
comes to repaying them, though, it's time to pay attention.
If you borrowed student loans, you are responsible for
knowing when your payments begin, how much they are and where to send them,
even if you don’t receive any notices with these details.
You can log on to your loan holder’s website to find out
when payments are due. If you're not sure who that is either, check the
National Student Loan Data System. This database covers everything about your
federal student loans.
Once you find who your loan servicers are, contact them to
make that first payment on time and set yourself up for success thereafter. If
you have private loans, you’ll have to check your credit report to find out who
the lender is.
2. You dropped some classes or dropped out of school: One
common reason why some borrowers don’t know when their first payment is due is
that they didn’t realize their repayment grace period was already winding down.
For federal student loans, the grace period kicks in when
students drop below half-time enrollment. Half-time enrollment is defined
differently from school to school. If you’re not taking a full course load, ask
your financial aid office to ensure repayment isn’t creeping up on you.
Of course, if you've left school altogether, you certainly
dropped below half-time enrollment. Even if you don’t complete your education,
you are still required to repay any loans you borrowed.
3. You can’t afford your payments: The student loan grace
period gives borrowers some time to figure things out before repayment begins.
However, after that time, you may still be looking for work
or barely able to cover your living expenses, let alone expensive loan
payments. In situations like these, some people ignore their loans until they
can pay them. This is the last thing you want to do.
Instead, talk with your loan holder about your different
options. If you borrowed federal student loans, you may be able to select a
payment plan that decreases the amount you pay each month, perhaps
based on how much money you make. You may also be able to
temporarily postpone your payments, with a deferment or forbearance.
Decreasing or pausing your payments may increase the amount
you repay overall. Still, that’s better than letting your loan default, which
will definitely add to what you owe.
4. You think you already defaulted: Borrowers often confuse
delinquency and default. If you miss a few payments, your loan is likely
delinquent, not in default, and you can still do things to avoid the
consequences listed above.
You may think you defaulted because you’re receiving late
notices and calls from your Study loan holder.
Instead of hoping they go away, talk to these people about your options.
Believe it or not, they want to help you.
If you have defaulted, don’t give up. You can pull your loan
into good standing by paying it in full, consolidating it or through
rehabilitation. Fees remain for each option, but vary between them. In
addition, upon completion of rehabilitation, the default entry gets removed
from your credit history.
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