People end their pursuit of higher education for different reasons. They may find they don’t really like their area of study. They might need to quit because of a family crisis or a personal health problem.
Whatever their reason for not finishing college, many of these students find that the end of a higher education dream gives way to a significant challenge: being on the hook for student loans but without a degree to help pay them off.
Student loan debt is part of a national crisis, hitting an all-time high and still climbing. By 2022, student debt is projected to grow to $2 trillion in the United States, with 40% of borrowers expected to default by 2023.
These numbers might be even worse for student borrowers who don’t earn a degree. Analyzing federal data, The Hechinger Report, a nonprofit news organization, points out that from mid-2014 to mid-2016, 3.9 million students with federal student loans dropped out. The default rate among borrowers without a degree is three times higher than among students who did earn a diploma.
The situation is particularly serious for students dropping out of for-profit colleges, where the default rate within 12 years is 50%.
Consequences of Student Loan Debt
The consequences of student loan debt, especially without receiving a degree, can be profound. Loans that go into default or have troubled payment histories can seriously damage credit scores, making loans for major purchases, such as a car or home, difficult or impossible to get. Ex-students can also be turned down for jobs when their credit history is checked.
If they have a federal loan that is more than 270 days in default, they may see their state or federal tax refunds or other government payments, such as Social Security, seized. The federal government can also garnish up to 15% of a delinquent loan holder’s wages.
Even if an ex-student can make regular payments on their student loan, the financial burden may mean they:
- Have a lower net worth than ex-students with no debt.
- Can’t afford to purchase a home.
- Can’t realize their dreams of financial independence and a certain standard of living.
Ex-students will also come face to face with the hard fact that student loan debt is different than other kinds of debt. While a consumer can return a car to a dealership if they can’t make the payments, you can’t return part of a college education for debt relief. And the debt stays with you. Student loans are rarely discharged in bankruptcy court.
The debt situation can also destroy any dreams of returning to school. A loan in default, for example, may ruin any chance of qualifying for federal student aid. Or the difficult experience of falling into debt could make the ex-student wary of sinking further into the loan quagmire.
What to Do If a Student Loan Has Gone Into Default
Many people don’t know much about the loans they have pledged to repay. So, an ex-student should try to get a clear view of the situation, determining:
- Who the lender is
- Whether it is a private or federal loan
- If it is current or in default, or headed that way
If a person is in default with their student loan, they need to address and resolve the situation as soon as possible, so they don’t face wage garnishment, student loan tax refund offsets, and other consequences.
Of course, the ideal would be to pay off the student loan in full or bring it up to date, but these aren’t always options for many people. Their other choices are loan consolidation or rehabilitation.
With consolidation, a single loan can be used to combine several smaller loans, sometimes resulting in smaller monthly payments. With federal student loans, you don’t have to apply for credit to get a consolidation loan.
With the rehabilitation program, the debtor makes nine payments that they can afford. With the last payment, the debt is rehabilitated. (Student loan rehabilitation can only be used once.)
The two methods of dealing with a student loan default have pros and cons. For example, a consolidation loan might be easier to get, covers all your student debts, and doesn’t involve negotiating with creditors. Rehabilitation does require negotiation with creditors, which can be a trying process, and each loan would probably have to be negotiated separately.
On the other hand, if your wages are garnished because of a loan default, you won’t qualify for a consolidation loan, so rehabilitation would be your only choice. While a consolidation loan won’t change your credit report, successful completion of the rehabilitation program will eliminate the default from the report. However, it won’t eliminate late payment notations or other negative marks.
Renegotiating Student Loans
If an ex-student has made regular federal student loan payments so that they are current, they can try to renegotiate them to lessen their monthly payment burden. Whether you graduate or drop out of school, the consequence is the same: You are placed in a 10-year repayment plan, with equal monthly payments.
While refinancing a student loan can help save money, that’s not always the case, so you need to check the terms carefully. For example, if refinancing lowers your monthly payment by spreading the loan’s timeline, you may wind up paying more for it in the long run.
When you refinance a student loan, the old loan is paid by a new lender, so you may lose some of the benefits of the original loan, such as eligibility for loan forgiveness or income-driven repayment plans.
With federal student loans, you can apply to have different ones consolidated, perhaps lowering your monthly payments. If you have federal student loans, you might be eligible for one of a few income-based repayment options, which could drop your monthly payment to a figure as low as $0. But be warned that an income-based repayment solution can have tax consequences – for example, if you are married and file jointly with your spouse.
Private loan refinancing requires a borrower to have good credit, at least if they want a favorable rate. Banks, credit unions, and financial institutions act as private student loan lenders and offer refinancing options. A good interest rate usually requires a credit score of 700 or better. You may also need a co-signer with a good credit rating.
Public Service Loan Forgiveness
While it’s not recommended to join the public service sector just for this reason, if a career in civil service is in your future (early childhood education, emergency services, or even the military, for example), you might be eligible for Public Service Loan Forgiveness (PSLF), which will write off your federal student loan after 10 years (or 120 payments).
However, in March of 2020, the Trump administration announced its intention to end PSLF for loans taken out on or after July 1, 2021. Loans taken out before this date would still be eligible. The administration wants to put new borrowers on a single income-driven repayment plan. After making “affordable monthly payments based on their income,” their outstanding amount would be forgiven after 15 years of repayment.
Know Your Options
If you have an outstanding student loan but no degree, it’s important to know all your repayment options so that you can successfully graduate into the school of life, minimizing the weight of the debt burden. At CollegeFinance.com, we are dedicated to helping students, parents, and graduates make informed choices about financing their college education, even if they don’t complete it.