Avoiding default on student loans
December 6, 2011
By Anne McCaslin Parker
Most seniors approaching graduation in May are excited. However, it is a time of financial worry. As if trying to find a job and figuring out how they will support themselves are not enough, some are about to face an even larger financial burden—paying back student loans.
“The big problem is that people do not pay attention to how much they are borrowing and it all adds up,” said Marcia Miller, associate director of financial aid for Southern Methodist University. “For a lot of students, they basically have got the price of a car that they are having to pay back.”
Student loans have become one of the most common forms of debt. Many students are not aware of how important it is that they pay back their loans in a timely matter. Unlike other loans, if one files for bankruptcy after college, student loans never go away. You will be stuck with them for forever.
After a usual six-month grace period, students are responsible to start paying the principle and interest on loans faithfully, every single month, until they are entirely paid back. According to Miller as of 2012, there will no longer be a grace period. While this is a hefty responsibility for some, many students are willing to take it to get the education they feel is the best for them.
Nick Cains, a senior at SMU, has taken out several loans each year in addition to scholarships and school grants. “I am thankful for the six month grace period and I think it will be okay once I do not have to worry about homework and extracurricular activities so I can focus on working and paying these back as soon as possible,” he said.
In contrast, some students do not think the responsibility of having to pay back loans after college is worth it. SMU student Baxter Finkbohner says that if her parents were not able to afford SMU tuition, she would have stayed at her in-state school and gone to college for a much cheaper price. “I would absolutely hate approaching graduation with anticipation of having to pay back loans while looking for a job,” she said. “I am very fortunate that I am not in this situation.”
If a student misses a payment on a loan, the loan goes into delinquency and the lender will most likely charge late fees. You are considered delinquent on your loan as soon as you miss a payment until you make all up-to-date payments. If the student does not pay in at least 270 days, the loan is considered a default. In this case, the loan agreement has been violated and the servicer has the ability to request immediate payment in full.
In September, the US Department of Education revealed a sharp increase in the percent of students who default on college loans. The number of people with education-related loan defaults rose to 8.8 percent in 2010, up from 7 percent in 2008. This is only a conservative estimate because it doesn’t consider the number of students in danger of defaulting over the next few years. Defaulting on a loan can cause long term negative consequences in regards to a student’s financial future. If The servicer may take your tax refunds or government benefits, or garnish your wages and it doesn’t have to go to court first because a loan contract has been violated. Defaulting can damage credit ratings, affecting your ability to rent a house or an apartment, get a job, applying for future financial aid or qualifying for any other type of loan. If you miss payments or default, the unpaid interest and default fees get added to your original loan balance, which will end up making the debt considerably larger. “If a student defaults on a loan then they can never borrow money for educational purposes again until the loan(s) are no longer in default,” says Miller. “So, if you are planning to go to graduate school, it is important to keep your loans current.”
If students plan to utilize loans to pay for college, it is important that they plan early for repayment to avoid those problems.
Tips to help students avoid default:
1. Seek out scholarships and/or grants. Before you apply for a loan, see if you qualify for a scholarship or grant that is offered from your school.
2. Understand your loan. Read the fine print. Make sure you know what rights and responsibilities the loan entails and the particular terms of your loan before you take one out. Know what the repayment obligation is and what the repayment options are. Make sure you keep records regarding your loan and of any forms that you sign.
3. Graduate! Students who have a college degree are less likely to have problems paying back their student loans because most have jobs.
4. Borrow as little as possible. It is important that you only borrow the amount that you need for college expenses and be careful to only borrow what you can expect to be able to repay. Default rates will increase if you over-borrow.
5. Call your servicer immediately at the first sign of financial trouble. If you are having problems or can not make a payment, seek help to see if there are any financing options avaliable for you. They may agree to a reduced-payment plan or to allow a temporary suspension of payments. By postponing payments, you can get short-term relief from making payments until your financial situation improves, while still maintaining your good credit. Miller says, “They want to work with you and may also be able to provide you information about deferments, forbearance, and graduated payment.” Both deferments (your repayment and interest accrual are frozen during economic hardship) and forbearances (repayments are frozen, but interest continues to accrue) allow you to temporarily stop making payments if you meet certain guidelines.
6. Notify your lender or server immediately if you have any changes that could affect the repayment of your loan. It is important to let them know if you have a change of address, phone number, or name, or if you transfer schools.
7. If you are able, make extra payments. Try making 13 payments a year instead of 12. It will make your loan balance diminish faster and will reduce the amount of interest you pay over the life of the loan.
8. Create and maintain a budget that is within your monthly income. Working throughout school may reduce debt. Depending on your situation, if you’re able to work, it may help pay for many of the costs.
9. Consider making nominal student loan payments while in school. This could help to reduce the amount you owe after graduation.
10. MOST IMPORTANTLY—Make your loan payments on time.
“I got really lucky going to a school where I have the opportunity to receive scholarships and grants,” said Cains. “I think it is really important to find a school that will provide this I would not have gotten a tenth as far as I have if they had not helped me out, but I still have loans to pay off.”
Miller’s biggest advice to her students at SMU is, “Do not stick your head in the sand and act like it is going away.”