If you are a student loan borrower thinking about dropping out of college, there is a lot to consider before making the final decision. Whether it’s the economic fallout from the coronavirus pandemic, unexpected family responsibilities or discovering college is just not a good fit , you should not put the debt aside and deal with it later. Be proactive and create a plan to address your student loan situation.
For those who have decided to permanently leave school, it’s important to note that all student loan debt must be repaid. Typically, federal student loan borrowers leaving school have a six-month grace period following withdrawal. Toward the end of that time, the student loan bills will begin to arrive.
Even if you have already thought about your student loans before dropping out of college, it pays to carefully understand all the potential impacts. You’ll want to protect against the possibility of student loan default. Research indicates that a large percentage of student loan borrowers who default are those who don’t complete their studies.
[READ: Student Loan Default: What to Know.]
Here are some key areas that affect what happens with your student loans when you drop out of school.
School Policies
Once you make your decision, be sure to follow school policies outlining steps to formally withdraw from classes. Typically, the registrar’s office can clearly explain the process to officially withdraw.
Contact your college to learn about the tuition refund policies. This information is usually posted on the school’s financial aid office website. You may be eligible for a refund based on your school’s withdrawal policy. Obtaining a refund will affect your overall finances and your ability to address your student loan balance.
[Read: College Tuition Refunds, Discounts an Uphill Battle Amid Coronavirus.]
Timing Considerations
If you decide to withdraw before completing at least 60% of the loan period, which is approximately an academic year, you could face a financial impact depending on how early you drop out and your college’s tuition refund policy. Federal student loan regulations may require the return of all or a portion of your federal aid, depending on when you withdrew.
Think about aligning your timing for withdrawal with the requirements of your loan issuers so that you don’t end up owing money to both the federal government and your school.
Your Student Loan Portfolio
It’s important to take inventory of all of your existing student loans. This includes tracking the loan servicers or holders, interest rates, balances and account information in one central place.
Make sure to understand the payment obligations for each of your loans. For example, those with federal student loans have 120 days from the date loan funds were paid out to cancel all or part of the disbursement before being liable for the money.
Also, learn the specific details of each loan. For instance, do any issuers charge a prepayment penalty for paying off loans early? And remember, private student loan issuers will have different requirements.
Your Total Picture of Debt
Your student loan debt is likely a small part of your overall financial picture. As you prepare to leave school, understand your particular situation, including credit card debt, a car loan or other debts.
Managing student loan debt during the ongoing pandemic or any crisis brings its own set of challenges, even given CARES Act relief, so a little planning can help you manage finances better.
Student Loan Repayment Options
When you withdraw from school, it’s a good time to review student loan repayment options — especially if your monthly income has changed.
One option is to consolidate all of your loans into one to reduce your number of monthly payments. Another option is to look into an income-based repayment plan to provide relief by lowering monthly payments and spreading them out over a longer period of time.
[Read: What to Know About Federal Student Loan Repayment Options.]
For most federal student loans, a default occurs after at least 270 days of nonpayment. This will damage your credit rating and affect your ability to borrow money in the future. Even if you have set up repayment options, if you can’t make payments, contact your student loan servicer to find out all of your options.
Moving Forward
Leaving college is a complicated and personal decision, especially when you have student loans.
It might be fruitful to revisit your decision. For instance, is it possible to attend college part time to not only continue building on your educational pursuits, but to delay having to begin student loan payments?
Once you make your decision, it’s important to understand that your student loans don’t disappear. The most useful approach is to clearly understand all of your options sooner rather than later in order to pay the balances off as soon as possible. Then you will be better prepared to move forward to your next opportunity.
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What Happens to Student Loans When You Drop Out of College originally appeared on usnews.com
