3,000 Students Default on Loans Every. Single. Day (and What to Do Instead)
As the college Class of 2017 prepares for May graduation with senior photos, celebratory beers and poor class attendance, they’re also preparing to become real-life adults.
Perhaps they have their first full-time job with benefits lined up, or maybe they’re still sketching out that five-year plan…
Either way, many of these students and soon-to-be graduates will likely face mounds of student debt.
This is nothing new. You’ve heard all the numbers before.
However, the U.S. Department of Education just released some new data about student loan defaults. (Hint: A lot of Americans are defaulting, which might not be the best choice.)
Certainly, the numbers outlined below are a little startling, but keep reading because there are other options you can take before deciding to default.
Americans Owe Trillions in Student Loans -- and Defaulting on Them
More than 42 million Americans owed a combined $1.3 trillion in federal student loans at the end of 2016, according to a Consumer Federation of America press release.
Note: This dollar amount doesn’t even include private loans, credit cards or home equity loans.
To put that into perspective, the average borrower owed more than $30,000 in student loan debt -- a 17% increase since the end of 2013.
A chunk of the data released focused on student loan defaults.
When you default on a federal loan, it means you haven’t made any payments in 270 days. Failure to pay means your entire balance becomes immediately due, according to The Penny Hoarder’s extensive student loan guide.
If you don’t pay it, then off to collections it goes. In addition, your debt increases because of late fees, interest and any extra fees stemming from collections.
In the long term, defaulting could make you ineligible for additional federal student aid and hurt your credit score. The government can also withhold your federal and state tax refund, or even ask your employer to garnish your wages to pay it off.
Consequences for defaulting are dangerous, but 1.1 million Federal Direct Loan borrowers still defaulted in 2016.
“3,000 preventable student loan defaults each day in America is 3,000 too many,” says Consumer Federation of America senior fellow Rohit Chopra.
But if you can’t make a payment, do you really have any other option than to fall in line with these statistics?
Yes, you do have options.
Consider Consolidating or Refinancing Before Defaulting on Student Loans
In fact, you have two major options: consolidating or refinancing your loans.
“Refinancing or consolidating your loans will generally mean replacing your laundry list of loans with one (or a few) loans that include all of your student debt,” writes Penny Hoarder Dana Sitar.
If you have more than one student loan payment, you might consider consolidating. This will lump all those payments into one balance. In the end, you’ll have one payment a month with one interest rate. Consolidating just makes your loans easier to manage and keep up with.
Refinancing means you’re taking out a totally new loan. Some perks of refinancing include a new (lower) interest rate and new terms.
We’ve written about several people who’ve had great success -- and savings -- when they refinanced their student loans.
- Jammie Proctor went back to school at 36 and earned a bachelor’s degree in electrical engineering from Georgia Tech University. Commendable for sure, but he came out with over $50,000 in student loans. He chose to refinance, and saved an estimated $6,000-$7,000. Plus, he should have it all paid off in about seven years. Read more here.
- After John DePrato refinanced his $65,000 of student loans from his bachelor’s and MBA, he felt crushed by his $850 monthly payment. This put a kink in his plans to purchase a house with his wife. When he refinanced, he cut those payments in half -- to $400 each month. You can read more about DePrato’s story here.
- Ashley Williams graduated college with $46,000 in student loan debt. That was six years ago. Now she owes more than $51,000 -- thanks to interest. She decided to refinance, which is saving her about $18,000 in interest and at least five years of payments. Read more about her decision to refinance here.
Each of these student loan-burdened individuals used Credible, an independent student loan refinancing marketplace.
“It’s like a Kayak or a Zillow for student loans,” says Michael Fishel, a Houston attorney who graduated from law school in 2012 with $135,000 in loans. “It’s brilliant.”
Not positive refinancing is the best option for you? We created a nifty flowchart that can help decide.
Your Turn: Has refinancing your student loans helped you save money?
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Carson Kohler (@CarsonKohler) is a junior writer at The Penny Hoarder.