June 19, 2013

Student Loan Repayment Tips for College Dropouts

Nearly 50 percent of students leave college without a degree, but many still pile up student debt.

Dropouts are four times more likely to default on their student loans than those who finish college, experts say.

College isn't always a walk in the park. Many students struggle through, stretching their four-year plan into a six-year one. Many more never make it that far.

Ben Nettleton made it a year and a half into his computer science degree at the University of Minnesota before deciding the major was "perhaps a bit too big of a bite," he says.

Instead of changing courses, he said sayonara to university life. What he could not say goodbye to, however, were his student loans.

Nettleton estimates that he and his parents borrowed around $12,000 in federal loans to finance his three-semester stint in college. He spent the next decade paying back his half.

"(I) kept the student loans around forever, like they were a pet," he says. "Stupid."

His story is not uncommon. Nearly 50 percent of college students drop out before earning their degree, but not before racking up student loans.

Those who do bow out early are four times more likely to default on their federal loans than those who graduate, according to financial aid expert Mark Kantrowitz, who conducted his own analysis of federal data.

While Nettleton did not fall into that category, he admits he could have taken a smarter approach to paying back his relatively small balance. The Houston-based content manager, who eventually earned an associate degree, paid only the bare minimum each month because of the loan's low 4 percent interest rate, which he calls "terrible logic."

These three tips can help college dropouts stay on top of their student loans and avoid becoming another statistic in Kantrowitz's default calculations.

1. Pay them off – ASAP: Student loan payments should be a top priority for dropouts, Nettleton says.

"If you're not going to be actively accruing them, then you need to be actively paying them off," he says.

Don't beat around the bush. If you have the means do so, pay the loans off quickly, he says.

"Paying them off at the minimum 'because interest is so low' is moron-speak," says Nettleton.

[Learn how to start repaying student loans.]

2. Inform yourself: One of the driving forces behind the elevated default rate among dropouts is lack of information, says Kantrowitz.

"Students who graduate undergo exit counseling where deferment and repayment plans are reviewed," he says. "Students who drop out do not learn about these options."

Students who graduate also have better employment and earning prospects, leaving them in a better position to handle monthly loan payments. For a student with $26,600 in student loans – the average debt load for the class of 2011, according to the Project on Student Debt – those payments amount to roughly $300 a month.

Dropouts who hit a financial bump in the road may be able to defer their federal loans for up to three years. While they can avoid payments during this time, they continue to rack up interest on the full loan balance for any unsubsidized loans, Kantrowitz says.

[Get advice on college financing from the Student Loan Ranger.]

Borrowers can also turn to alternative repayment plans such as graduated repayment, which cuts that $300 payment nearly in half. Income-based repayment could drop the payment even lower. These plans set monthly loan payments at 10 to 15 percent of a borrower's salary and wipe out unpaid loan balances after 10 or 25 years, depending on the plan.

While these options reduce the monthly payment, they extend the length of the loan and the amount of interest paid, Kantrowitz notes.

"Increasing the term on an unsubsidized Stafford loan from 10 to 20 years will reduce the monthly payment by a third, but will more than double the total interest paid over the life of the loan," he says.

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