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What Happens to Loans if You Drop Out of College?

There are several reasons a student may choose to withdraw from college, and it can come with a lot of questions. If you have loans, you may wonder what happens to student loans when you drop out. Any debt will still be owed, but you have options that can relieve the pressure of debt. Continue reading to learn more about what happens to your student loans if you drop out of college.

Don’t miss: What to consider when you’re thinking of dropping out of college

What happens to federal loans if you drop out

Federal student loans that were disbursed to you must be repaid if you drop below half-time enrollment or withdraw from college before completing your degree. The school will notify your loan servicer about the status change, and your loans will enter repayment.

Most federal loans have a 6-month grace period, which starts when you leave school. During this time, monthly payments are not required. However, if your loans are unsubsidized, they will accrue interest during the grace period. It can be worthwhile to make small payments on your interest while in the grace period.

The only federal student loans that don’t have a grace period are PLUS loans–repayment begins as soon as they are disbursed. Graduate students with PLUS loans can request a 6-month deferment on their PLUS loans after leaving school with no consequences. Additionally, parents with PLUS loans can request that same grace period when their student leaves school.

If you received federal aid for the next year, but don’t plan to return to school, you have 120 days to cancel the disbursement before you’re on the hook to repay it.

When your loans enter repayment, you’ll have to complete exit counseling. This will inform you about your repayment options and terms.

Related: Definitions of key student loan terms

What happens to private loans if you drop out

Like federal student loans, private loans enter repayment when a student leaves school or drops below half-time enrollment. 

Depending on your lender, you may or may not receive a grace period. Interest will accrue on your private loans during your grace period (if you receive one). Before dropping out of school, be sure you know the terms of your private loans so that you’re ready to start repayment.

Student loan deferment

Many students leave college due to financial or personal issues, which can make it difficult to repay your student loans. 

If you’re dropping out because of hard times, it is possible to request a deferment on your federal student loans. Student loan deferment is a temporary suspension of your monthly student loan payments. Keep in mind, though, that interest will accrue on unsubsidized federal loans during deferment. This will cause you to pay more over time. Students must request deferment by submitting an application with the Department of Education.

Most private lenders offer deferment in a variety of situations. Check with your lender to learn your options if you’re not ready to begin repayment.

Additionally, returning to school will put your student loans back into deferment. This is also true if you decide to attend a trade school. For example, Sallie Mae offers deferment when students return to school or enter an internship, fellowship, clerkship, or residency program.

See also: How to get your student loans deferred

Other options

Dropping out of college with debt can be stressful, but you have some additional options for managing student loan repayment. 

For federal loans, if you can’t afford your fixed monthly payment under the standard 10-year plan, you can enroll in an income-driven repayment plan (IDR). There are 4 IDRs. Each bases monthly payments on your annual income. If your monthly student loan payments are too high, one of these plans may help you get a lower amount. Payments can even be as low as $0! 

Private loans can be refinanced to get a single monthly payment and to lower interest. Keep in mind that refinancing federal loans will cause you to lose access to benefits such as IDRs and Public Service Loan Forgiveness. 

Also see: Public Service Loan Forgiveness: What it is and how it can help you

Debt is still owed

Bottom line, your student loan debt is still owed if you don’t complete your degree. Loans will not be canceled because you didn’t get the education you planned. Use this advice to prepare for your student loan repayment!

Frequently asked questions

Will I lose student loan money if I drop out of college?

If you drop out of college, you’ll still have to repay the student loans you took out. You won’t have to take out any future student loans, so you will reduce the total debt that you would have graduated with. However, you’ll also lose the potential boost to your earnings that a college degree could provide. Make sure to weigh your decision carefully before deciding to drop out.

Do my loans enter repayment if I take a semester off?

These terms vary based on the repayment terms of your loans. Private loans can each have their own repayment terms, so you’ll want to contact your loan servicer to find out. However, Federal Direct Loans all have the same policy. That policy is that you’ll have to begin repayment 180 days after the last day of your completed semester. So, if you restart school within six months of your last day of the semester, they won’t enter repayment.

Do I have to repay my loans if I re-enroll in college?

If you end up returning to college after dropping out, you can defer any of your federal student loans until you graduate. This means you won’t have to be making any payments on them until after you graduate and pass your grace period. Direct subsidized loans will also not accumulate interest while they are deferred, though other loans will.

Private loans typically work the same way, but be sure to check with your loan servicer, as terms vary by lender.

Do I have to pay back my Pell Grant if I drop out?

Students who drop out within the first 60 percent of your semester, you may have to pay back a portion of your Pell Grant funds. However, as long as you remain enrolled until after the 60 percent mark of the semester, you will not have to repay any Pell Grant funds.