Believe it or not, it’s possible to drift into student loan default without even realizing it.
If you’re not on top of your loans, or if your finances have undergone some major changes, you could be at risk of default — and that could affect your finances for years to come.
Obviously, defaulting on your student loans is a serious mistake. These loans are almost impossible to discharge in bankruptcy, and defaulting will tank your credit score — making it difficult or impossible to open other lines of credit, buy a car or house, or even get basic utilities.
Here are a few questions to ask in order to protect yourself.
1. Do you know when your first payment is due?
If you just graduated or are about to graduate, you may not realize when your student loan payments start. It’s easy to lose sight of it when you’re dealing with upcoming finals or the stresses of post-graduate life.
Most federal loans have a six-month grace period. However, federal PLUS loans don’t have any grace period, and Perkins loans vary depending on your school. For private loans, a six-month grace period is also typical, but not guaranteed.
If you aren’t sure when your student loan payments kick in, check with your lender ASAP. If you don’t know who your lender is, check the National Student Loan Data System (NSLDS) to find out.
2. Have you dropped any classes?
For most student loans, the grace period countdown doesn’t just start when you graduate. It’s also triggered when you drop enough classes to be considered a “half-time” student.
Half-time status is defined differently depending on your school. If you’ve dropped below a full course load, this may affect your grace period — that's why it’s important to check with your financial aid office.
3. Do you know when your loan is considered “in default?"
Federal loans aren’t considered in default for about nine months after your first missed payment.
Private loans go into default sooner — usually after about 60-90 days, but sometimes it’s much sooner. Some lenders consider you in default after your first missed payment.
If you aren’t sure when the cutoff date is for default, ask your lender.
4. Is it taking you longer than six months to land a good job?
Considering the economy, it’s no surprise that for many students, six months is not enough time to land a decent-paying job. If you’re approaching the end of your grace period and you’re still unemployed or underemployed, you have options.
There are also income-driven payment plan options to reduce your monthly payments, such as Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
For private loans, you don’t have these formal programs, but you can still contact your lender and explain the situation. They may be willing to help.
Refinancing can also reduce your monthly payments by as much as $250 or more. If you don’t qualify on your own, you may be able to refinance with a cosigner.
5. Has your financial situation changed?
Major changes in your financial situation can have a cascade effect on your finances — including your student loans. Losing a job, taking a pay cut, having a medical emergency, or having to care for an ailing family member can all start the spiral.
Even happy changes such as having a child, going back to school, getting married, or buying a house can unexpectedly upend your finances. It’s important to be prepared.
The consequences of default are severe and to be avoided at all costs. Know the terms of your loan, and be proactive in renegotiating those terms if you need to.
Refinancing is one of the most effective tools in your arsenal for avoiding default. Check out our Student Loan Refinancing Calculator to see how much you could reduce your monthly payments.