What Happens to Student Loans When You Drop Out of College?

When a student leaves college before completing their degree, their student loan arrangements change. Understanding these changes is important for managing student loan debt effectively. Borrowers should pay careful attention to their loan status, repayment options, and potential consequences of non-payment.

Understanding Your Loan Status After Withdrawal

When a student formally withdraws from college or drops below half-time enrollment, federal student loans typically transition out of “in-school” deferment. Most federal student loans, like Direct Subsidized and Unsubsidized Loans, have a six-month grace period. Federal Perkins Loans may offer a nine-month grace period.

During this grace period, interest generally accrues on unsubsidized federal and private loans. PLUS loans do not have a grace period, but graduate or professional student PLUS loan borrowers may receive a six-month deferment after leaving school or dropping below half-time enrollment.

Identifying your loan servicer is a crucial initial step. Borrowers can find their federal loan servicer information through the Federal Student Aid website. Private student loans have varying grace period policies, so checking the specific loan agreement is necessary.

Exploring Repayment Management Options

Once the grace period concludes, loans enter repayment. If financial circumstances make standard payments challenging, contacting the loan servicer is the most important action.

Deferment

Deferment allows a temporary pause in loan payments. For subsidized federal loans, interest does not accrue during this period. Common types include unemployment, economic hardship, and cancer treatment deferment. Borrowers apply by completing a form and submitting supporting documentation.

Forbearance

Forbearance also permits a temporary suspension or reduction of payments. Unlike deferment, interest generally continues to accrue on all loan types during forbearance. This accrued interest is often capitalized, increasing the total amount owed. Forbearance is usually granted for up to 12 months for reasons like financial difficulty or medical expenses.

Income-Driven Repayment (IDR)

IDR plans adjust monthly payments based on the borrower’s income and family size. These plans can significantly lower monthly payments, potentially to $0, and may lead to loan forgiveness after 20 or 25 years of qualifying payments. Borrowers apply online through the Federal Student Aid website, providing financial documentation. Income and family size must be recertified annually.

Implications of Defaulting on Student Loans

Failing to make student loan payments can lead to severe consequences, particularly if a loan enters default. For most federal student loans, default typically occurs after 270 days of non-payment. Private student loans may enter default more quickly, often after 90 to 180 days of missed payments, depending on the lender’s terms.

Once a federal loan defaults, the entire unpaid balance, including accrued interest, can become immediately due, a process known as acceleration. Default severely damages a borrower’s credit score, making it difficult to obtain future credit for housing, vehicles, or other financial needs. This negative mark can remain on credit reports for up to seven years.

The government can also employ various collection actions without needing a court order for federal loans. These include administrative wage garnishment, where up to 15% of disposable pay can be withheld directly from earnings. Tax refunds and federal benefit payments, such as Social Security, can also be intercepted through Treasury offset to repay the defaulted debt.

Defaulting on federal student loans results in the loss of eligibility for future federal student aid, as well as access to deferment, forbearance, and income-driven repayment plans for the defaulted loans. Borrowers may also be charged substantial collection costs, which can be as much as 25% of the outstanding loan balance, further increasing the total debt. Legal action, including lawsuits, can also be pursued to recover the debt.

Specific Conditions for Loan Discharge

Student loans are generally difficult to discharge, but certain limited conditions allow for federal loan cancellation.

Total and Permanent Disability (TPD) Discharge

TPD discharge is available if a borrower cannot engage in substantial gainful activity due to a physical or mental impairment. This impairment must be expected to result in death, last for at least 60 months, or be of indefinite duration.

Death Discharge

In the event of a borrower’s death, federal student loans are discharged. The remaining balance is not passed on to their estate or family. This discharge requires a death certificate submitted to the loan servicer.

Closed School Discharge

This applies if a student could not complete their program because their school closed. Eligibility depends on whether the student was enrolled when the school closed, on an approved leave of absence, or withdrew within a certain timeframe before closure. If approved, loans obtained for the closed school are discharged, and payments may be reimbursed.

False Certification Discharge

A loan may be canceled if the school falsely certified a borrower’s eligibility, such as in cases of identity theft or inability to meet employment requirements for the field of study.

Bankruptcy Discharge

Discharging student loans through bankruptcy is exceptionally difficult. It requires proving “undue hardship” through an adversary proceeding in bankruptcy court. This standard involves demonstrating an inability to maintain a minimal standard of living, that this inability will likely persist, and that good faith efforts have been made to repay the loans.

Impact of Re-enrollment on Loan Status

Returning to college can significantly alter the status of existing student loans. If a borrower re-enrolls at least half-time in an eligible program, their federal student loans typically revert to an “in-school deferment” status.

The grace period, which begins after leaving school or dropping below half-time enrollment, can be affected by re-enrollment. If a borrower returns to school before their initial grace period is fully utilized, the remaining portion is usually reset. Upon leaving school or dropping below half-time enrollment again, a full new grace period will typically apply.

Re-enrollment generally does not automatically resolve defaulted loans. Specific actions, such as loan rehabilitation or consolidation, are usually required to bring a defaulted loan back into good standing.

Re-enrollment can also impact eligibility for future federal student aid. To receive new federal loans or grants, students must maintain Satisfactory Academic Progress (SAP) according to their institution’s policies. This includes meeting GPA requirements and completing a certain percentage of attempted coursework.