How To Pay Back Student Loans If You Drop Out

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Dropping out can have implications for student loan repayment if you took out loans when you started attending a higher education institution. The clock begins to run on any grace period you have before repayment must begin if you drop below half-time enrollment, meaning you're taking less than half of the full-time course load.

You'll have to start making payments on federal student loans or private student loans when the grace period ends. Unfortunately, your debt doesn’t disappear if you don't end up earning a degree. 

Key Takeaways

  • Most student loans offer a grace period after leaving school and before you are expected to start repayments, though interest will accrue during this time.
  • Depending on your lender, you may have many options for repayment; federal student loans have income-driven plans to help manage payments.
  • You may be able to refinance your student loans, but this is not always advised as you'll lose many benefits when shifting from a federal to private lender.
  • Deferment is a temporary pause of payments, but eligibility is limited; forbearance is easier to secure but interest will accrue.
  • The federal government paused student loan repayments and interest accrual during the COVID-19 pandemic, with legislation to assist borrowers ongoing.

What Happens to Student Loans When You Drop Out? 

Some federal and private student loans offer a grace period before you're required to make payments. Your grace period countdown starts if you drop out of school while you have student loans.

You have six months before payments start for most federal loans, but it’s important to check in with your lender to be sure. Interest continues accruing during your grace period on all private loans, as well as on most federal student loans except for subsidized direct loans.

Note

On Aug. 24, 2022, President Joe Biden announced via Twitter the cancellation of $10,000 of federal student loan debt for eligible borrowers, and $20,000 for federal Pell Grant recipients.

Borrowers risk negative consequences to their credit score if they don't repay any loans owed, leading to financial roadblocks in the future when trying to buy a car or obtain a credit card.

Explore Your Repayment Options

You have several options if you've dropped out and your grace period is coming to an end, or if you want to get a jump start on repaying loans before interest accrues on your balance.

Increase Your Income To Make Full Payments 

Start making payments on your student loan debt as soon as possible after dropping out if you can afford to do so, even during the grace period. This will reduce your balance more quickly. You’ll also avoid accruing interest, which is an issue for anyone with private loans or loans that aren't set at 0%. 

You may need to increase your income before you can afford to make full payments. There are many ways to do that, including asking for a promotion at your current workplace (if you have one), looking for a new job and negotiating your salary, or finding a side hustle. You can start repayment right away after you're no longer attending school if you're able to earn enough.

Talk to your loan servicer about having payments automatically taken out of your bank account on a regular basis, ensuring that you never miss a payment. 

Note

On Tuesday, Nov. 22, 2022, the Biden administration extended the pause on payments and interest on federal student loans for the eighth time. Borrowers with federal student loans won’t have to make payments, and loans won’t resume accumulating interest, until 60 days after court cases challenging Biden’s student loan forgiveness program are resolved or the Department of Education is allowed to move forward with the program. If the cases aren’t resolved by June 30, 2023, payments will resume two months after that.

Sign Up for Income-Driven Repayment

Income-driven payment options may be right for you if you're concerned that you won't have the money to make student loan payments after dropping out.

You'll pay a set amount on your loans each month based on your earnings and family size under an income-driven plan. The amount you'll pay may not be enough to cover the interest in full and begin reducing the balance, but loan forgiveness options exist after a certain number of on-time payments. 

Note

On Aug. 24, 2022, President Joe Biden’s administration proposed a new plan for federal student loan repayment for undergraduate loans. The plan would cap monthly payments at 5% of your monthly income. After 10 years, whatever remaining balance you have would be eliminated if the original loan balance was $12,000 or less.

Your monthly payments should be affordable with an income-driven repayment plan even if your job doesn't pay much. Your monthly payment could be as low as $0 in some cases if your income is low enough.

Note

Income-driven payment options are only available for federal loans, not private ones. 

Consider Refinancing Private Student Loans

You may be able to reduce your payment through refinancing if you have private student loans. This would involve getting a new student loan from a private lender to repay your existing debt. You could reduce your monthly payment if your new loan has a lower interest payment, a longer repayment timeline, or both.

Refinancing to a loan with a longer repayment timeline could increase your total interest costs, however, even if you reduce your interest rate. You would owe the lender interest for a longer period of time. 

You must be able to prove through a good credit score and proof of income that you can repay your loans. This may be difficult if you've recently dropped out of school and aren't earning a lot of money. But it can help you get approved for a loan at a lower rate if you apply with a cosigner who has more income or a stronger credit history.

Warning

Refinancing generally isn't a good idea for federal loans because it would require that you get a new loan from a private lender. That would mean giving up income-driven payment options, generous forbearance and deferment options, and other federal borrower benefits. 

Explore Options for Deferment or Forbearance

If you’re facing financial hardship, it’s possible to suspend your federal student loans for a brief period. There are two options for relief: deferment and forbearance. Both allow you to stop making payments for a given period of time.

Eligibility for deferment is limited. You must meet certain criteria, such as serving in active duty military service or participating in an internship or residency program related to your career.

Forbearance is the better option in most cases for those who know that their financial hardship is temporary, although interest will accrue. Deferment can work well for individuals who have some subsidized student loans and want to avoid interest accrual, or who are unsure how long their financial instability will last.

Many private lenders will also permit you to put loans into forbearance, but it’s best to discuss the rules and policies with your lender. They can vary depending on the organization. 

Tip

Explore other repayment plans prior to considering deferment or forbearance because of the impact on interest and potential loan forgiveness.

Student Loan Repayment and Interest Pause

According to the U.S. Census Bureau, more than 16 million Americans abandoned plans to attend classes at a post-high school institution in the fall of 2020 as a direct result of the economic disruption and general fear surrounding the coronavirus pandemic. 

The U.S. Department of Education has extended its student loan forbearance period multiple times. It was initially instated in March 2020, and it now expires in 2023. Forbearance suspends collections activity and pauses interest accrual. Reach out to your lender if you haven't yet been notified by your loan servicer of the deadline change.

Individuals who have federal student loans aren't expected to make payments. You can benefit from the 0% interest rate if you want to continue making payments. This reprieve applies only to federal student loans. Private loan payments are not automatically paused, and interest will keep accruing if you're in a grace period or have requested forbearance.

Consider Your Obligations Before You Drop Out 

Deciding whether to drop out of school is a big decision, and it's important to consider all the financial implications before you make your choice, including the challenges of boosting your earning potential without a degree.

You may want to talk with academic advisors and financial aid counselors before you decide. They can help you explore your options and ensure that you're making the decision that's best for you. 

Frequently Asked Questions (FAQs)

Do I have to pay back my student loans if I drop out of school?

Yes. You are responsible for the full repayment of any loans you took out to attend school, regardless of whether or not you end up using the money for this reason. If you have funds that have been disbursed to you personally for school-related expenses and you don't plan to use them, you should pay these back right away if you can to avoid earning interest. If you can't afford repayment just yet, ask your lender about grace periods and repayment plans.

What happens if I don't pay my student loans?

After one missed payment your account is considered delinquent, and after multiple missed payments (or 270 days of delinquency for Federal loans ) you may reach default. This will harm your credit score and may come with additional penalties and repercussions.

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