No one intends to drop out of college. If you show up to campus for your freshman year, chances are you plan to graduate in four years and use your degree to land a job. Maybe you even have the whole thing mapped out, step-by-step.
But then life happens. Whether it’s a family emergency, deteriorating health, stress burnout, or just the realization that college isn’t the right choice, plenty of people choose to drop out of their university every year. The problem is, your student loans don’t go away just because you never ended up with a degree.
So how should someone in this position approach student loan repayment? Are there any unique considerations to take into account? Here’s what you need to know.
Choose an Income-Based Repayment Plan
If you have federal student loans, you’re eligible for the same repayment options available to borrowers with a degree.
You may currently be on the standard 10-year repayment plan, which will have the highest monthly payments and the lowest total interest. You have the option of switching to a less expensive option if you’re struggling with those payments. Use the official repayment calculator to see which plan lets you pay the least.
When you choose an extended, income-based, or graduated repayment plan, you’ll pay more interest overall than if you stuck with the standard plan. If you’re not working toward a specific forgiveness program, then it’s best to switch back to the standard plan as soon as you can afford it to minimize the interest.
Refinance Private Loans
Private student loans have fewer income-based repayment options than federal loans, and they rarely offer deferment or forbearance options. But you can refinance private loans for a lower interest rate, even if you dropped out.
There are a few lenders that service borrowers with uncompleted degrees.
These may include:
- MEF
- RISLA Student Loan Refinance
- EDvestinU
- PNC
- Wells Fargo
- Purefy
- Discover Bank
- Advance Education Loan
- Citizens Bank
To be a good candidate for a student loan refinance, you must have a high credit score and no recent bankruptcies or defaults on your credit report. You also need a low debt-to-income ratio, and some lenders may have income requirements.
Financial aid expert Mark Kantrowitz of SavingforCollege.com said borrowers are unlikely to be good refinance candidates immediately after college because lenders usually require a minimum amount of full-time employment.
If you dropped out recently, you may want to wait a year before trying to refinance private loans. During that time, check your credit score through Mint, pay all your bills on time, avoid opening new loans or lines of credit, and pay your credit card bill in full every month.
Explore Deferment and Forbearance
Once you leave school, you’re eligible for a six-month grace period where federal student loan payments are put on hold. You won’t accrue interest during this time if you have subsidized loans, but you will if you have unsubsidized loans.
If you still need more time after the grace period has expired, you can apply for deferment or forbearance. Borrowers have to apply for deferment and forbearance manually and wait to be approved.
Deferment and forbearance are both federal programs that let borrowers avoid paying their student loans while still remaining current. The main difference between the two options is that interest will not accrue on your loan balance during deferment, but it will accrue during forbearance. For that reason, it’s harder to qualify for deferment.
Be careful about putting your loans in deferment or forbearance for a long time. The interest that accrues will capitalize, meaning it will be added to your loan’s principal. This will increase your total monthly payments and could delay your debt payoff timeline.
Apply for Public Service Loan Forgiveness
Public Service Loan Forgiveness (PSLF) is a program that encourages borrowers to choose a non-profit or government job. In exchange, your remaining loan balance will be forgiven after 10 year’s worth of payments, which do not have to be consecutive. It’s even available to borrowers who dropped out and never finished a degree.
“PSLF is always an option because it’s employer-dependent,” said student loan lawyer Joshua R. I. Cohen.
PSLF is only available for federal loans, and only those loans that are part of the Direct Loan Program. If you have FFEL or Perkins loans, you’ll have to consolidate them as part of the Direct Consolidation Program. This process will render them eligible for PSLF.
Be sure not to consolidate loans that are already part of the Direct Loan Program. If you’ve already been making payments, consolidating loans will restart the clock on PSLF, and you could lose credit for eligible payments you’ve already made.
The employer you work for must also be an eligible non-profit or government entity. Only full-time employees qualify for PSLF, which excludes part-time workers and independent contractors.
To be eligible for PSLF, you should fill out the employment certification form every year. This form asks for your employer’s contact information, your employment status, and more.
Once you submit the form, you should receive a notice verifying your employer and how many eligible payments you’ve made. Doing this every year will make it easier when you apply for forgiveness after your 120 payments have been made.
“It also gives borrowers an opportunity to dispute any errors or undercounts well before they reach eligibility for loan forgiveness, giving them plenty of time to address disputes,” said student loan lawyer Adam S. Minsky.
Borrowers can save money while working toward PSLF by choosing an income-based repayment plan instead of the standard 10-year plan. They also won’t owe taxes on the forgiven amount, so it’s best to choose the least expensive monthly option.
Try to Discharge Your Loans
If you couldn’t complete college because the department you were studying in closed, or your school committed fraud, you may be a good candidate for discharging your student loans completely. If this happened to you, contact a student loan lawyer who can help you file a case.
