Are you a graduating senior? Congratulations! You are about to enter the "real world." That’s the good news. The bad news is the economy is still unstable – and the graduating class is graduating with a higher student loan burden than any class in history.
Not only is harder than ever to find a job – but unemployment is making it even harder to deal with repaying thousands – if not tens of thousands – of student loans.
All that adds up to an expected spike in the rate of student loan default.
I know, I’m Ms. Sunshine this morning!
But here’s the good news. There are things you can – and should — do to avoid defaulting on your student loans. Here are the top five tips to avoid student loan default:
1. Know Your Grace Period
Most loans provide a 6-month grace period – the time between when you finish school and have to start making repayments on your loan.
Take a few minutes NOW to read the fine-print on your loans (you know, all that paperwork you stuffed in a drawer somewhere? Get it out and read it!). Know how long your grace period is and when your first repayment is due. Mark it down in your calendar, so there’s no way you forget.
2. Update your details
Your loan company will be sending your repayment vouchers, which you include with your monthly checks. If you pay online – or use automatic debit – these vouchers are just a handy reminder when a payment is due.
If the loan company doesn’t have your updated mailing address, you might not get these vouchers. That doesn’t mean you don’t have to pay back your loans! Repayment is your responsibility, with or without those handy vouchers. But making sure the bank can find you makes it easier on everyone.
3. Understand the consequences
Paying back your student loans on time – every single month – is no joke. If you have Federal loans (Stafford or Perkins), the very first late payment is considered delinquency. 9 months of delinquency and you are in default.
Not only can default kill your credit score, but more importantly, with a federal loan, it gives the federal government automatic ability to start garnishing your wages. You may not think you can afford to pay your loans, but the government is going to get its money whether voluntarily or by force.
Furthermore, your federal loans are not bankruptable. That means that even if everything else in your life totally falls apart, those student loans are never ever going away.
4. Plan ahead
Even if you are still in your grace period, it’s not too early to start setting aside money to make those repayments.
Let’s say your first payment won’t come due until November, but this summer you land a job working as a lifeguard at your neighborhood pool. You will be living at home to save some money. Good plan!
Why not make it great by setting aside $200 per pay period in a savings account? Come November, you will have as much as $1,000 toward your first (and subsequent) loan payment(s). Hopefully you will have landed an awesome job by that point and be well established in your own place. But if you’re still stuck on the interview circuit, that $1,000 will definitely come in handy!
5. Make a back-up plan
If you lose your job, experience economic hardship, become disabled, or will be attending school again at least half-time, you are entitled to apply for deferment.
Deferment allows you to defer repayment of your student loan (both principle and interest) for a set amount of time. Once your deferment ends, you must resume repayments, or you will be considered delinquent.
Forbearance is similar to deferment, but you have to pay back the interest. Like deferment, you must get written permission in advance and your forbearance will have a defined end date. Never just stop paying your loans – you will trigger delinquency and possibly default.
For more information on student loan default and how to avoid it, read What You Need to Know about Paying Back Your Student Loans and 10 Steps to Avoid Defaulting on Your Student Loans.