If you're currently wrestling with student loan debt, you’re not alone. A study done by Brookings Institution found that two in five borrowers are likely to default on their student loans within five years.
But before you go into panic mode, let's talk about what those survey results really mean and discuss ways you can avoid becoming a statistic.
Who is most likely to default?
Three groups of student borrowers stood out in the study:
- Students did complete their degree
- Students with smaller debts, and
- Students who took out loans to attend for-profit institutions.
Lets talk about what that means to you.
Students who never completed a degree
Paying on a student loan that didn't result in a degree is a tough pill to swallow—you probably have debt to pay without the salary you were expecting.
If this is you, you might want to consider revisiting your educational goals. There are two good reasons for this: you'll have an opportunity to raise your income, and you can defer your federal student loans as long you maintain part-time status.
Focus on going to a local, less-expensive school, such as a community college. Meet with an adviser to find out what credits you've already earned that you can transfer over. Be sure to have a concrete plan for which classes you should take every semester to complete your degree.
Students with smaller debts
If you consider yourself safe from default because you only borrowed a small amount, you might want to take a look at your current situation. The study found that default rates depend more on student and institutional factors than on average levels of debt.
Just because you didn't borrow as much as your friend doesn't mean you're safe from defaulting on your student loan. Even if your loan is smaller, make sure you're still being proactive about paying it off.
Students who took out a loan to attend a for-profit college
The cost of attendance for a for-profit college or technical college is often high compared to the amount of time you're there.
This causes some students to borrow more than they would if they went to a public two-year college.
How to avoid default on your student loan
While the study paints a scary picture, especially if you are in one of the high-risk groups, there are things you can do to avoid becoming a statistic.
Refinance your student loan
When you refinance your private or federal student loans, you can save money over the life of the loan.
By swapping out your existing loan for a new one with a lower interest rate, you can lower your monthly payment, lengthen the term of your loan to lower your monthly payment even more, or pay off your loan faster.
Consolidate your student loans
Consolidation is a way to join multiple monthly loan payments into one.
When you consolidate through a federal Direct Consolidation Loan, you may be eligible for a lower monthly payment since this extends the life of your debt. Even though you will be paying off your debt for a longer period of time, your monthly payments will be lower—and hopefully easier to keep up with.
Consolidating through a private lender can lower your interest rate to lower monthly payments or allow you to save money over the life of your loan.
See also: Should I Consolidate My Student Loans?
Explore income-based repayment
If you have federal loans, you may be eligible for an income-driven repayment plan.
These repayment plans allow you to cap your monthly payment at an amount that is based on your income and family size—generally 10% of your discretionary income.
Apply for forbearance
Forbearance is the temporary relief from your obligation to make payments on your federal student loans. Your lender may grant you a forbearance if you’re facing a financial hardship, such as a serious medical issue that leaves you unable to work.
However, keep in mind that since interest still accrues while your loan is on hold, so this should be your last resort.
Find out how much you could save by refinancing your student loans.