If you took out student loans to pay for college, you’re no doubt aware that those monthly payments can be a strain on your limited financial resources. But if you don’t manage to keep up with your loan payments, you risk going into default, at which point your credit score might take a massive dive.
Now, to be clear, you’re not necessarily considered to be in default the minute you miss a payment. In fact, if you took out federal loans for college, you’re not in default until you’ve gone 270 days without a payment (although you’ll still be considered delinquent on that debt, which can hurt your credit, too). With private loans, there are no preset thresholds -- some lenders will report you to the major credit bureaus as being in default after a single missed payment, but usually, you’ll need to go for more like three months without making a payment before that happens.
Still, you’re better off avoiding a default on your student debt, so pay attention to the following signs that you might be headed in that direction.
1. You're paying a high interest rate on your loans
The higher your loan’s interest rate, the costlier it will be to pay back. You may not realize just how expensive your loan payments are until they begin coming due, but if that number is too high to reasonably keep up with given your income, you run the risk of defaulting on your debt.
A better bet? Take steps to lower your interest rate. If you’re dealing with federal loans, you should have a reasonable interest rate to begin with, but if you borrowed privately, it pays to look into refinancing. In doing so, you can swap an existing loan for another with a lower interest rate attached to it, thereby making your monthly payments more affordable.
2. Your loans have a variable interest rate
One nice thing about federal student loans is that their interest is fixed for the duration of your repayment period. That means that your actual loan payments will be predictable. Private loans, on the other hand, often come with variable interest rates, which can cause your monthly payments to climb over time, thereby making them harder to manage.
The solution? Once again, it can boil down to refinancing. If you’re able to lock in a lower fixed interest rate on your loan, you’ll make your payments more affordable.
3. You're already cutting back on essentials to make your loan payments
It’s one thing to slash your spending on entertainment or dining out to keep up with your student debt payments. But if your loans are forcing you to cut back on things like groceries, transportation, and other expenses that are essential to functioning as an adult, then you may be at risk of defaulting on that debt altogether.
Thankfully, you have options for making that debt easier to manage (other than refinancing, this time). If you took out federal loans, you can apply to get yourself on an income-driven repayment plan, which will recalculate your monthly loan payments to be a reasonable percentage of your income. And although private loans don’t offer income-driven repayment in the same official sense as federal loans, you can still reach out to your lender, explain the hardships you’ve been facing, and try to negotiate your payment terms. Your lender might agree to a lower monthly payment if it avoids a default situation, which isn’t good for anyone involved.
Defaulting on your student debt is bad news, and if it happens to you, your credit could suffer for many years. If you’re at risk of defaulting on your loans, get ahead of the problem -- before it’s too late.