by Mara Strom
Did you know that a Stafford or Perkins student loan is one of the only forms of debt that cannot be discharged in a bankruptcy claim? Student loans are with you for life – so you need to be serious about paying them back.
If you haven’t paid back your loans for 270 days (and have not arranged for deferment or forbearance), then you’re in default. Three out of four people who default on their loans do so after dropping out of school.
In addition to trashing your credit rating and bringing collection agencies to your front door, defaulting on your student loans entitles the government to intercept your tax returns and garner up to 15% of your take-home pay. Convinced that defaulting is serious? Here are 10 steps to prevent it:
1. Don’t bite off more than you can chew. The cut-off point is a loan that’s twice your expected salary. Prepare to live like a starving student while you’re in college, so that you don’t have to when you graduate.
2. Read your note. Before you sign on the dotted line, make sure you fully understand the terms. This loan is your responsibility. Not even getting hitched will change that – since your student loans can no longer be consolidated with your spouse’s.
3. Get organized. Make a spreadsheet with the names of your lenders, amounts of each loan, interest rates and monthly payments. Tally up the total and confirm that you can pay that big number on your monthly salary. If not, consider consolidation (see #7).
4. Be a bookkeeping nerd. Once your grace period ends, make sure you have a file for each student loan that contains the following: all personalized communication with your lenders, cancelled checks, consolidation offers and approvals of deferment or forebearance (see #8).
5. Be punctual. Make your monthly payments on time. Set up an automatic debit from your checking account, if you’re lax about deadlines.
6. Stay in touch. Notify lenders immediately if you move, get married or change your student status.
7. Consider consolidation. You can reduce your total monthly student loan payment by consolidating – either by getting a lower interest rate or by extending the life of your loan. Either way, you’ll only have to worry about one monthly payment.
8. Ask your lenders for help. If you lose your job or have to take a pay cut, you may not be able to make your monthly student loan payments. Apply to your lenders for deferment or forbearance. While you’re waiting for approval, keep paying back your loans. Remember: You can’t get approved if you’re in default.
9. Ask your lenders for more help. If your loss of income is permanent, ask your lender about alternate repayment, which will reduce your monthly bill by lengthening the life of your loan. You will pay more in the long-run, since interest never steps accruing, so consider this an almost last-resort option.
10. In the worst-case scenario, pay back the federal government first. If you’ve got both federal and private student loans and you’re about to default on them, do whatever it takes to keeping afloat on the federal ones. They have more flexible repayment options – and harsher penalties for default.