Leaving school or dropping below a part-time status can majorly impact your student loans and financial aid, and it’s important to know what to do if this happens to you. Here’s our guide for what to do if you withdraw from school, what to expect with your student loans, and how to handle them.
The Different Types of Student Loans
What each type of loan involves, and how they differ from one another
At its most basic level, a loan is money or property borrowed with the expectation that it will be paid back in full, plus any interest accrued. Student loans are sums of money given to students with the purpose of paying for educational expenses. The types of loans offered to students include Stafford loans, which are either subsidized or unsubsidized, Parent Loan for Undergraduate Students, or PLUS for short, private loans, and consolidation loans.
The most common types of loans offered to and used by students are Stafford loans, which are partially need-based, and private loans.
Stafford loans are awarded to each student through their financial aid package, which is created after each student completes their FAFSA to report their household income. These loans are awarded in a fixed amount, and the student is given the choice of accepting or declining the offer. Subsidized Stafford loans differ from their counterpart because they do not accrue interest while the student is enrolled in school, while unsubsidized loans do accrue interest during the student's time in school and during deferment periods.
Subsidized Stafford loans are only offered to students who present financial need, while unsubsidized Stafford loans are open for all students to take advantage of. Despite their widespread availability, these unsubsidized loans typically only come in amounts of a couple thousand dollars, of which students can choose to accept part or all of.
Students who have taken out these Stafford loans and are still unable to pay for the rest of their educational costs often turn to private loans, which vary heavily from the federal loans mentioned above. Private loans are taken out from “private organizations such banks, credit unions, and state-based or state-affiliated organizations” and tend to be more expensive than federal loans due to the lenders creating their own terms and interest rates.
Aside from these two types of loans, many students choose to take out Parent PLUS loans, which are federal loans that accrue interest but place full responsibility on the parent of the student to pay back. If these loans are defaulted, or not paid back over an extended period of time, the consequences fall on the parent rather than the student to whom the loans were provided for.
With a better idea of what these types of student loans entail, you’ll be prepared for the next section detailing what happens to loans if a student withdraws from their school. For a more in-depth look at student loans, check out our guide to education loans.
What Exactly Happens to Student Loans if You Withdraw?
The consequences of withdrawing and how to deal with student loans after withdrawing
Withdrawing from school doesn’t always mean dropping out from your university. Withdrawing means that a student has dropped below half-time or part-time status, but they can still be enrolled in a class or two each semester while still being given this title.
If you become withdrawn from school and you’ve taken out student loans, your lender will become aware of your status, leading your loans to enter repayment. Repayment means that your loans will be due and you’ll be expected to start paying them off within a time frame specified by the lender.
If you drop out, implying that you are no longer taking any classes at your university and have not received a degree from your school, you will still be expected to pay off the loans that you have taken out. This applies even if you plan on taking a year or two, or longer, gap from school and plan on returning to finish your degree at a later point. These loans will still be with you, and you will have to start paying them off during your gap, regardless of whether you plan on going back to school or not.
If you’re unable to immediately start paying off your federal loans, have no fear, as some types of loans have grace periods where the lendee is not yet expected to start making payments towards their loans.
Federal loans like both the subsidized and subsidized Stafford loans have a grace period of six months, and the Graduate PLUS loans do as well. The Parent PLUS loans do not have a grace period, parents can request to defer their payments for up to six months after their student has dropped below part-time status.
All private loans have a grace period that is dependent on the lender and what you potentially choose before you take out the loan. Some loans give the option of a six month period, which students can choose to accept or not, while others do not have that option at all. Be sure to always read up on the terms of your loans before you accept them, and always make sure that you have a detailed plan for how you can pay them off.
What Happens if You Don’t Pay Back Student Loans?
A guide to defaulting and how to potentially avoid it
If payments are not made on a loan following its grace period, then it will be considered delinquent. Missed payments might also accrue a late fee, which can add up considerably over time.
For federal student loans, delinquent loans are not reported to credit bureaus unless they are 90 days past due. Once 90 days pass, these unpaid loans can start damaging your credit significantly. There may be a short period where you can catch up on loans without it inflicting major damage on your credit, but as time goes on, it can take a serious toll.
Private loans becoming delinquent is a different story; they aren’t beholden to the rules of federal loans and can create their own terms with grace periods. Delinquent private loans can damage your credit faster, with some loans only allowing 30 days until they are able to affect credit scores. It’s essential to read up on these loans before taking them out, making sure to understand how much time you have until they impact you if you become unable to pay them back within the specified time frame.
If your credit is seriously damaged by these delinquent loans, it can make it difficult to take out loans in the future, find housing, and obtain other services. If you are able to take out a loan despite a poor credit score, you might be paying higher interest rates than someone who was able to pay their student loans on time.
If federal student loans are over 270 days past due, they enter into default. Again, this time is typically shorter for private loans but ultimately depends on the lender’s terms. Some private loans even enter default immediately if a payment is missed, so be careful.
Student loans are extremely hard to get rid of if you’re unable to pay them off. There are some programs that offer partial loan forgiveness, but they come with their own terms and requirements. Ultimately, it is the responsibility of the student and their family to pay off both federal and private loans, but to have a set game plan about how to pay them off before even taking them out.
Regardless of your reason for withdrawing from school, knowing what to expect for loan repayment after withdrawing is essential. Credit is no joke, and taking loans seriously and only taking out ones that you know you’ll be able to pay back is always the best way to go.
