Though repayments on federal student loan debt is paused until May 2022, that doesn’t mean that it’s out of sight, out of mind. Many American college graduates have hefty student loan debt in their names. Millions of students take out loans every year to cover the cost of their college education, and the process is very abstract. It can almost feel as though the loans aren’t real money. The reality is that many young adults will be faced with large student loan balances and no real plan to pay them off. It’s critical to your financial health to make a payment plan and avoid student loan default.
Tips to Avoid Student Loan Default
Most young adults graduate college with two things in their name: a diploma, and student loan debt. When taking out any loan, it’s important to research your loan agreement. This includes interest rates, monthly payments, and length of repayment. Such details can help you calculate how much you can afford and thus help avoid student loan default.
What Happens if you Default on a Student Loan?
First thing’s first, let’s define default. If you have not made student loan payments for 270 days (roughly 9 months), your lender will consider the loan to be in default.
When you go into student loan default, it can take years to rebuild your credit and to recover financially. Here’s what will happen if you default on your loans:
- The unpaid balance of your loan plus interest will become due and payable immediately.
- Your credit rating will be severely damaged, making it hard to buy a car or house, rent an apartment, take out a loan or get a credit card.
- You may be sued by the lender and have money withheld from your wages and tax refunds to help pay back the amount you owe.
- You’ll no longer be eligible for repayment plans and other options for student loan debt relief.
- You will lose eligibility for federal student aid in the future.
5 Steps to Avoid Defaulting on Student Loans
- Understand your loans and loan agreements. Research the types of student loans you have, the variety of repayment options, and different programs offered to federal and private loan borrowers. Read your promissory note, which is a legal document.
- Make payments on time. Making payments on time is the best way to avoid default and eventually pay off your loan. It’s an excellent way to build credit.
- Create a budget. Create a post-college budget that includes all expenses, from credit card payments to utilities and groceries. By creating a budget and sticking to it, you can ensure enough savings to be able to pay your loans on time.
- Keep good records and track your loans. Track all payment schedules and keep a paper record of every monthly payment.
- Address any financial challenges quickly. If you are having trouble making your monthly payment, don’t wait to address the problem. Research your options and talk to your lender. You may be able to switch repayment plans, consider an income-driven repayment plan, change a payment due date, or secure a deferment or forbearance.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.