Student loan default is a growing concern in the United States. In fact, nearly two percent of the population (7 million borrowers) has defaulted on their loans. The consequences of failing to make your payments on time can be far reaching. Not only will you likely incur collection fees, but you could also have your wages garnished, federal income tax refund seized, and be denied additional federal financial aid, including Pell Grants. A defaulted student loan can also adversely affect your credit rating, which may result in higher interest rates on credit cards, difficulty in renting a home or apartment, or worse, being denied employment. You may even have to pay more for car or home insurance, or be unable to renew certain professional licenses. To ensure you don’t find yourself facing the possibility of student loan default and dealing with a slew of problems, follow these five tips for paying back your debt on time.
1. Know What You Owe
It’s important to understand who your lenders are, how much you owe, and when your payments will begin. If you took out federal loans, you can check this information by visiting the National Student Loan Data System (NSLDS). For non-federal or private student loans, you’ll need to contact the lender directly, check your latest billing statement, or contact your school. Different types of loans have varying grace periods, so don’t assume all will give you six months before your payments will begin. For example, federal Perkins Loans have a nine month grace period, but a Direct PLUS Loan enters repayment once it has been fully disbursed, unless you meet certain conditions. The grace period for private loans varies, so consult your lender to determine when your first payment will be due.
2. Understand Repayment Options
Once you know what you owe and when your payments will begin, it’s important to choose a repayment option that works best for you. If you have a federal student loan, the Standard Repayment Plan will charge you the least amount of interest over time, but sets a fixed amount ($50 or higher) that is due each month with up to ten years to pay off the balance. The Graduated Payment Plan is also paid out over 10 years, but payments start out lower and increase over time. There are additional options if you have borrowed more than $30,000 (Extended Repayment Plan), have had a financial hardship (Income-Based or Pay as You Earn Repayment Plan) or are looking for plans that are tied to your annual income level (Income-Contingent or Income-Sensitive Repayment Plan). Visit Federal Student Loan Repayment Plans on our website to understand the eligibility requirements and terms for each option before choosing one that is right for you. State, institutional, and private loans have varying repayment options, so contact your lender directly to see what may be available to you.
3. Get Ahead of the Game
If at all possible, start making small payments on your student loans while you are still in college, as it can save you money and help you pay off your loans faster. Except for Direct Subsidized Loans, where the government pays your interest while you are in school, interest is being charged every day on your federal student loans. In most cases, this interest will not be added until you graduate (or at the end of your grace period), but once it is, you’ll begin paying interest on the new, higher loan balance. By simply paying the interest each month while you are in school, you can save hundreds (or more!) over the life of the loan. If you’re already in repayment status, consider sending in more than the minimum required, as this can reduce your principal and, thus, the amount of interest you are charged. Be sure to notify your lender or loan servicer in writing that you want the additional funds applied to your principal or it will may be applied to future payments instead, which will not lower your interest fees.
4. Keep Out of Trouble
If you find that you will not be able to make your payments as planned, don’t avoid your lender(s) or servicer(s). There are options available to help you when you have a setback or other unexpected problems. Ask if you may be eligible for a deferment or forbearance, which will allow you to delay or postpone payments. Certain situations, such as unemployment, illness, or military service during a war or national emergency may qualify. Although deferment or forbearance are only temporary, these options can help you get back on your feet without jeopardizing risking the consequences of default.
5. Stay in Touch
Although it’s important to contact your lenders when you have payment issues, it’s equally important to keep them in the loop about changes to your email or postal address, and phone number(s). This will ensure you receive any important communications regarding your loans and payment status, which will help keep you on track and out of trouble.
Remember, your student loan lenders are not your enemy. Most are happy to work with you whenever you have a problem, as long as you are forthcoming and honest. Don’t ignore letters, emails or phone calls, as your loans will not simply go away. For more information on how delinquency or late payments can affect your loans, check out this helpful tool from American Student Assistance.