Student loan default is the worst case scenario for a college graduate–at least that’s what our national culture would have you believe. Fear hangs over graduates’ heads because credit scores are our financial identities.
If you are a borrower, there is a chance you could end up in the 13.7 percent of people who default on their student loans. There are, however, plenty of ways to stop student loan default in its tracks, as well as many options for graduates who absolutely must choose to default.
Here are realistic ways to prevent default and manage damage control if you must default on your loan.
Tell Your Lender Immediately If You Can’t Make a Payment
Our very first tip is: don’t panic! It’s scary when you feel like you can’t make your student loan payments. Fear will make you procrastinate. You’ll tell yourself you can get back on track, and choose to ignore the missed payment for a month or two. This is a vicious cycle.
One missed payment won’t land you in default. But, after a short 270 days past due, you’ll have to face the music. Don’t fall into this trap, because you have much better options! If you talk to your lender early, they can go over your options to refinance, consolidate, and, in special scenarios, defer on your student loans. But, if you default on your federal loan, you’ll lose your eligibility for forgiveness plans.
The bottom line is, the sooner the better. If you wait until the 270 period is almost up, you might not have time to talk to your lender about your ideal plan option.
The Little-Known Strategy for Not Defaulting on Your Student Loans
So many students and recent graduates get hung up on their budget plans, savings, finances, and interest rates. These are central to student loan payoff, but they’re not the secret recipe to financial security.
Studies show that the most important part of your strategy to pay off student loans is choosing the school that’s right for you. The statistics prove that the majority of borrowers who default on their student loans never completed their degree or credential.
When borrowers drop out of school, or struggle at their school of choice, they’re much less likely to pay off their student loans. Students who thrive at their college and choose a well-researched major they’re passionate about find it much easier to follow through on student loan payments. If you choose a path that’s right for you, you’ll be much more motivated to prioritize your student debt, and much more capable of paying it off.
Should I Refinance My Loan to Avoid Default?
First, assess whether or not you qualify. Student loan refinance can be a lifesaver–or, at least a loan-saver. Student loan services have an impressive success rate, and can help you determine whether or not loan refinancing is right for you. Here’s a quick checklist to get you started:
- Are you sure you can pay back your loans? Once you refinance, you lose some flexible Federal repayment options that you might need down the line if you’re struggling to pay.
- Can you lower your interest rates by refinancing?
- Which refinancing option is right for you: a fixed interest rate or a variable interest rate? A fixed rate is better for long term payment because it doesn’t fluctuate, while a variable rate is better if you plan to pay your loan off quickly.
- Determine whether your lender requires an origination fee. You’ll need to include this fee when budgeting.
- Do you have a federal loan, a private loan, or both–and will it benefit you to combine them?
- Do your credit score and salary meet the refinance requirements?
- Does your bank or financial service have exemplary customer service? Don’t underestimate this point. You’ll want a personable team that understands which payment option is right for you.
This is where tip #1 comes in handy. You don’t want to procrastinate on talking to your lender or financial institution about missed loan payments. Deferment is a crucial strategy to avoid student loan default, but you can only choose this option if you haven’t yet defaulted on your student loans. Deferring on your student loans allows you to postpone your payments until a later time. Keep in mind, you may still need to pay your interest during deferment. Deferment is only interest-free for subsidized loans.
Graduates with massive outstanding debt may consider settling. The challenges of this option are you might need to pay large lump sums of your settlement, a settlement is difficult to obtain, and you’ll likely need a lawyer. However, if you succeed in settling, you may save yourself tens of thousands of dollars in student loans.
Succeeding at loan cancellation requires you to meet very specific criteria. This option is hardest to achieve, but is also the most effective at getting rid of your student loans. Private loans are different in this case because they don’t have the same range of options as federal loans. They are much more difficult to cancel, but don’t let this scare you if you think you qualify for loan cancellation.
Student loan default, like most debt, can be seriously stressful. Remember, there is a wide range of options for all loan types and default cases.