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How to Avoid Student Loan Default

More than 44 million Americans have some form of student loan debt, and the national student loan debt toll is over $1.5 trillion — and climbing. With so many people in debt, it is perhaps unsurprising that a number of borrowers are faced with difficulty in paying off their student loans.

According to the U.S. Department of Education, 11.5 percent of student loan borrowers default on their federal student loans. Department of Education statistics show that students from certain types of school are at a much higher risk of defaulting. In particular, private institutions with degree programs of 2 years of less have a default rate of 19.8 percent. In contrast, four-year degree programs for private colleges have a default rate of just 7.0 percent. At the time of the report, New Mexico had the highest rate of student loan default, at 18.2 percent.

Avoiding default should be a top priority for anyone with student loan debt. Going into default can result in a negative mark on your credit score that can take years to undo, making it difficult to get ahead or establish yourself financially. Fortunately, even if you are struggling to meet your student loan obligations, there are ways to avoid default. Read on to learn how you can make your payments — and prevent damage to your credit score.

Find a School with a Return on Education

Every student is worthy of achieving financial responsibility and independence. With an abundance of occupations and programs to choose from, it can be difficult to find a clear path forward with a career that will give you a great outcome.

As you’re going through the process of down-selecting and applying for a college, vocational training school, or online program, avoid over-borrowing and committing to a loan that you will be unable to pay back. A great way to determine whether or not you’re getting a return on your education is to look at the outcomes and salary data of students who have graduated from your potential school or potential field.

Simply put, one of the easiest ways to avoid defaulting on your student loans is by making sure you select a school and a program that will provide you with a great outcome.

Student Loan Refinancing

If you are having trouble making your monthly payments, consider refinancing your student loans. Refinancing is a process where you take out a new loan to pay off other loans. Generally, the new loan has a lower and/or fixed interest rate, which can save you thousands of dollars in interest and help you pay off your loans more quickly.

Refinancing is only offered through private lenders, although both private and federal student loans can be refinanced together. If you refinance your federal loans, however, you will lose the benefits of these loans, such as the ability to participate in income-driven repayment plans.

Refinancing is generally only available to borrowers with good credit scores, a decent income, and a history of making on-time payments. It’s typically seen as an option for students who have already made a large amount of payments on previous loans, thus proving their credit worthiness.

Federal Loan Consolidation

Similar to refinancing, you can also consolidate your federal student loans. This is different from refinancing, in that it does not give you a lower overall interest rate. Instead, your current interest rates are averaged, which will not result in a lower interest rate. This method can only be used for federal student loans.

Consolidation can lower your monthly payments by extending the repayment period to up to 30 years. While this can be helpful in the short-term, it will cost more in the long-term, as you will pay interest over a longer period of time. At any rate, this is still a viable way to avoid defaulting by lowering your monthly payment to a more manageable number.

Income-Driven Repayment Plans

If you have federal student loans, income-driven repayment plans are a way to reduce your monthly payment if you meet certain income qualifications. In short, an income-driven repayment plans caps your monthly payment to a percentage of your income. With an income-driven repayment plan, you may also be eligible for student loan forgiveness after you make a specified amount of payments. Similar to federal consolidation, this option is only available to federal student loans.

There are a number of income-driven repayment plans, each of which caps your monthly payment at a percentage of your income. You can apply for these plans through your student loan servicer. While these plans have the immediate effect of lowering your monthly payment, they do increase the amount of time that you will be paying off your student loan, and the overall cost of the loan. In addition, any amount of the loan that is forgiven will be considered taxable income.

Making Half-Payments Every Other Week

If you are having difficulty making one big student loan payment each month, consider whether you can make two smaller half-payments each month. You could time this to coincide with your paychecks — and end up saving money on your student loans. This can be done for either private or federal student loans.

This method helps borrowers pay down their student loans more quickly because you end up making an extra payment each year (26 half payments = 13 full payments). In addition, because you are paying twice a month, there is less time for interest to accrue on the principal. But it only works if you have the ability to make these payments, so it may not be an option for all borrowers.

Deferment or Forbearance

If you are truly struggling to make payments and simply do not have the funds to pay for your student loans, you may be able to suspend your student loans through deferment or forbearance. Each of these options allow you to stop making payments on your student loans for a set period of time, although unless you have a subsidized federal loan or Perkins loan, interest will accrue on these loans during this time.

Generally, private lenders only offer forbearance. You can contact your lender directly to request forbearance if you are experiencing financial hardship. For federal student loans, you have the option for either deferral or forbearance, depending on your circumstances. Depending on your situation, you may be able to put off making payments for up to three years.

The major advantage of this option is that it allows you to stop making payments on your student loans when you are financially unable to do so. The big drawback is that in most cases, interest will be accruing on these loans, which means that when you begin to repay the loans, you will owe more overall.

Conclusion

If you are in danger of defaulting, do what you can to avoid this problem. While it can be a challenge to get back on track with your student loan payments, the consequences of default are so severe that it is worth investing the time and energy to come up with a game plan.

By Andrew from LendEDU – a consumer education website. Check out their blog if you want to read up on various different financial topics.