What Happens to Student Loans When You Drop Out?
Understand your student loan obligations and options after leaving college, ensuring a smooth financial transition.
Student loans are a common way to finance higher education, but understanding their implications, especially when academic plans change, is important. When a student withdraws from college, the responsibility to repay these loans does not disappear. Instead, specific timelines and obligations come into play, requiring borrowers to understand their financial commitments.
Understanding Your Grace Period
Upon leaving school or dropping below half-time enrollment, federal student loan borrowers enter a grace period. This period provides a temporary pause before loan payments are required. For most federal Direct Subsidized and Unsubsidized Loans, this period lasts six months. Federal Perkins Loans may offer a nine-month grace period, while Direct PLUS Loans do not have a grace period but may offer a six-month deferment that functions similarly.
During this time, payments are not mandated, allowing borrowers to organize their finances and select a repayment plan. However, interest accrues on unsubsidized federal loans and all private student loans during the grace period. This accrued interest can be added to the principal balance of the loan, a process known as capitalization, once repayment begins, leading to a higher total amount owed. Paying down this interest during the grace period can help reduce the overall cost of the loan.
Transitioning to Repayment
Once the grace period concludes, loan payments become due. Borrowers are placed on the Standard Repayment Plan for federal loans if they do not choose an alternative. This plan involves fixed monthly payments over a period of up to 10 years, with a minimum payment of at least $50 per month. For consolidation loans, the repayment period can extend from 10 to 30 years, depending on the total debt.
Loan servicers, companies that manage loan accounts, notify borrowers about the impending end of their grace period and the start of repayment. It is important for borrowers to keep their contact information updated with their loan servicer and on the Federal Student Aid website (studentaid.gov) to receive these communications. Interest begins to fully accrue on all types of federal loans, including subsidized loans, once the repayment period commences.
Exploring Repayment Options
Managing student loan payments can be challenging, but various options are available, especially for federal student loans, to make payments more affordable. Income-Driven Repayment (IDR) plans adjust monthly payments based on a borrower’s income and family size. Payments under IDR plans can be as low as $0 per month for some individuals, and any remaining loan balance may be forgiven after 20 or 25 years of payments, depending on the specific plan.
Beyond IDR plans, borrowers might consider deferment or forbearance, which temporarily postpone payments. Deferment is available for specific situations like unemployment, economic hardship, or returning to school at least half-time. During deferment, interest on subsidized federal loans does not accrue, while interest on unsubsidized loans continues to accrue. Forbearance offers a temporary suspension of payments, but interest accrues on all loan types during this period. Borrowers must apply for these programs through their loan servicer to determine eligibility and initiate the process.
Addressing Non-Payment and Default
Missing a student loan payment leads to delinquency. If a federal student loan remains delinquent for an extended period, 270 days, it enters default. For private student loans, the timeline to default can be shorter, sometimes as few as 120 days of missed payments.
Once a loan defaults, the entire unpaid balance, including accrued interest, can become immediately due, a process known as acceleration. Defaulting can lead to consequences, such as the loss of eligibility for additional federal student aid, deferment, forbearance, and income-driven repayment plans.
The federal government can also garnish wages up to 15% of disposable pay, without a court order. Additionally, federal tax refunds and other federal benefit payments may be withheld and applied toward the defaulted loan through a process called Treasury offset. Default is reported to credit bureaus, damaging a borrower’s credit rating and affecting their ability to secure future loans, housing, or employment.