How to Avoid Defaulting

Its best said " A wise person will value education. A successful person will have an education. And a smart person will pay for it."  Not everyone is lucky enough to get a free ride through college. Most students take out student loans  to pay for their education.

Student loans are one of the rare things in life where you don’t have to think much about them for a few years. But once you graduate and once you are really on your own, lenders are more than happy to congratulate you on your new diploma by reminding how they helped you get it.  

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But if you fail to make an installment payment when due or the failure to comply with other terms of your promissory note or written repayment agreement, is called defaulting. If you are a defaulter, that means you’re 270 days or more late in making a loan payment.

There are ways that students and families can plan ahead & avoid defaulting. Since 1998, student loans have been exempt from most bankruptcy protection.

First, it’s important to understand that implications of loan defaulting.

Consequences can include:

• The entire loan balance (principal and interest) can be immediately due and payable.  

• You’ll lose your deferment options.

• Your account might be turned over to a collection agency. If so, you’ll have to pay additional interest charges, late fees, collection costs, and possibly court costs and attorney fees. These costs will really add up, and it will take you even longer to pay off your student loan. 

• You won’t be eligible for additional federal student aid. 

• Your account will be reported to national credit bureaus, and your credit rating can be damaged. You might find it very difficult to receive other types of credit, such as credit cards, car loans, or mortgages. Because many landlords do credit checks, it might be hard to rent an apartment. Some employers check to see if you’re responsible by looking at your credit rating, so bad credit could even affect getting a job. On top of this, your default will remain on your credit report for up to seven years

• Your federal income tax refunds (and in some states, your state income tax refunds) might be withheld and applied toward your loan repayment. This happens a lot to defaulters, and it can really hurt if you were counting on that refund. 

• Your employer, at the request of the loan holder, may withhold (garnish) part of your wages. 

• You might be unable to obtain a professional license in some states.

It’s important to plan ahead. Often times a bank will give you all the money you want for college, but that isn’t always the most financially sound decision. You must be reasonable how your career plans will affect you ability to pay off loans. Consider what kind of support and financial commitments you have from family.

Before signing on the dotted line, consider the following:

• Don’t take out a loan just because you can. Actively seek scholarships, grants, and need based financial aid that you don’t have to pay back. Make it a goal to only take out in loans what you absolutely can’t afford to fund in other ways. The less you borrow, the less you owe back. 

• Is the school you are going to reasonable for your ability to pay off the loans in the future? Don’t plan on having a killer job that will easily take care of you. Not everyone can afford Yale outright. Be realistic.

During your school career:

• Don’t forget that scholarships are available for students currently in college. Stay on the ball in finding innovative ways to help pay for you education.  There are literally millions of dollars in grants that go unclaimed every year. They’re yours for the taking. 

• Pay off as much as you can during school when there is no interest. Many schools offer on-campus jobs that pay decently.  Paying off your loan when you don’t’ have to will make the bank more likely to work with you if you get in trouble in the future.

• If you decide to leave school for some reason before you finish, make sure that school gives any unused dollars back to the bank. Keep in mind that if you drop out without a reason qualifying you for deferment, you are expected to begin paying on your loan.

After you graduate:

• If you do need help, talk to the bank handling your loan. They would much rather give you three months off without penalty and waive a few fees then have to take you to court and lose all their money.

• Start paying on your student loans immediately. Building a good payment history will not only build your credit, but also make the bank more willing to work with you if you need help.

There are certain things that are important to know that qualify you for loan payment deferment, meaning you don’t have to pay on your loan during your deferment periods. If you enlist in the military, become a parent, become temporarily completely disabled, or if you are unemployed you are likely eligible for loan deferment. Banks aren’t going to go out of their way to find a reason for you not to have to make payments. It is up to you to report a situation that qualifies you for loan deferment.

An education opens your eyes to the world.  Managing your student loans can be complex, but it is important that you satisfy what you borrow. 

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