How to Avoid Defaulting on Your Student Loans
Over 67 percent of college seniors had taken out student loans as of the 2011-12 academic year, according to The National Center for Education Statistics. That same year, the student loan default rate reached 10 percent. Obviously, no one enters school planning on defaulting on their student loans – defaulting can ruin your credit, impacting everything from your ability to get a mortgage or a car loan to getting hired for your dream job. PayScale’s College Salary Report shows how college choice affects ability to earn enough to pay back loans; to help students avoid common mistakes when taking out their first loans, we spoke via email with Anne Del Plato, Regional Director for U-fi Student Loans.
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PayScale: What’s the biggest misconception students have before they take out their first student loan?
Anne Del Plato: Student loans have become so prevalent that students often look at them as just another type of financial aid, but there is an important difference: student loans must be paid back. Before taking out any kind of loan, students should fully understand that loans will need to be paid back after they leave school. It is also important to know about the types of education loans, the terms of those loans, and the options available. When estimating the total amount you may need to borrow, consider your entire educational program. To get a general idea of what your monthly loan payment may be, Federal Student Aid provides an easy-to-use repayment calculator.
PayScale: How can students determine how much debt is too much debt?
Anne Del Plato: For most students who take out loans to pay for college, the investment will pay off. Studies show that college graduates earn 70 percent more than those with just a high school degree. (Source: Current Population Survey, U.S. Department of Labor, U.S. Bureau of Labor Statistics.) Responsible borrowing can be a good investment in one’s future. Students should try to limit borrowing to only what is needed and avoid unnecessary credit card debt. An important factor for students to think about is how their expected earnings after graduation compare to their student loan debt. Planning ahead pays off. This income-to-debt calculator can provide a good idea of what’s to come.
PayScale: Which loan options do students typically overlook?
Anne Del Plato: Students should first consider all the scholarships, grants, and work-study for which they qualify. As far as loans, students should first borrow through the federal student loan programs. To assure consideration for all types of financial aid, including federal student loans, students must complete a Free Application for Federal Student Aid (FAFSA). The aid is determined by the college’s financial aid office.
Private loans may be a viable option if additional funds are needed. The current market conditions create competitive interest rates and many programs offer no origination fees. Private loans are provided by banks, credit unions, and other financial institutions, and a cosigner is frequently required.
There are also loan options at repayment that borrowers may overlook. When borrowers leave school, they can consider consolidating their federal loans or refinancing all education loans into a new private loan. Benefits can include extending the repayment term and simplifying repayment by combining multiple loans into one new loan. Loan refinancing may reduce interest rates, but that depends on the borrower’s and/or cosigner’s credit qualifications. [Note: Students should also pay attention to whether private loans have a fixed or variable interest rate, which can add up to more money over the life of the loan. –Ed.] Students should research their options first. Loan consolidation or private loan refinancing is not the best choice for everyone.
PayScale: What can students do if something changes? (For example, if their school offered them a lot of money freshman year, but cuts their funding for subsequent years.)
Anne Del Plato: Generally, if a student’s situation remains similar, colleges work to be consistent in awarding aid. Students should ask themselves:
- Has my family’s financial situation changed? If income goes down, family size increases, or other significant changes have occurred since the period reflected on the FAFSA, students should notify the financial aid office and complete any required supplemental forms.
- Did I meet FAFSA deadlines? Students may receive less aid if they miss required application deadlines, so it’s essential to submit the FAFSA on time, even if income must be estimated.
- Is some of my aid performance-based? Some grants and scholarships may be based on achieving a specific Grade Point Average (GPA) or other performance criteria outlined on the original award notification. At minimum, most aid requires that a student makes Satisfactory Academic Progress toward their degree. Financial aid offices at colleges are a great resource.
As indicated in the previous question, if a student needs additional funds to pay for college after all aid is awarded, he or she may want to consider other sources, such as a private loan.
PayScale: What should graduating seniors do to make sure they’re financially prepared for life after college?
Anne Del Plato: All loans – federal and private – have servicers assigned to them. Loan servicing organizations provide information and assistance to borrowers, and are responsible for billing and collecting loan payments. Graduating seniors often need help with navigating the world of personal finance and student loans. Student loan servicers are fully versed in this area and can also offer financial literacy resources, such as budgeting and credit tips, to help you stay on track. Learn as much as you can about managing your money effectively to ensure a financially stable future.
Students start hearing from their loan servicers as soon as loans are disbursed. If a student hasn’t already set up an online account with his or her servicer(s), now is the time. An online account allows borrowers to view their loan balance, review payment options, and begin to assess whether consolidation or loan refinancing may be right for them after they leave school. Borrowers can also contact their loan servicer by phone, email, or via online chat. Loan repayment is long-term and can be complex. Students should allow themselves time to gather information and assess options. For federal loans, students can find information about their servicer and their loans at www.nslds.ed.gov. For private loans, a student should check his or her lender’s website.
PayScale: What’s the single best thing students can do to avoid defaulting on their loans?
Anne Del Plato: The best thing students can do for their student loans is to get into the habit of paying their loans on time each month. An easy way to ensure on-time payments is to set up automatic deductions. Many lenders offer an interest rate discount or other financial incentives for borrowers who sign up for auto debit. If a borrower runs into financial problems, they should reach out to their student loan servicer(s) right away. Deferments and forbearances may be available in the case of temporary unemployment or other financial difficulties. Staying in touch with loan servicers, keeping current on loans, and being aware of the options available are some of the best ways to stay on track.
Anne Del Plato is the Regional Director for U-fi Student Loans and is an expert in many aspects of financial aid, student loans, and debt management. Anne’s experience includes positions in a number of areas of higher education finance including college financial aid offices, training and outreach development for a state financial aid agency, and most recently, as a Regional Director of Nelnet’s Partner Solutions team. Anne has spoken at numerous financial aid conferences across the Northeastern United States.
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