What Happens to Student Loans When You Drop Out?

Dropping out of college is a major decision that may have financial repercussions if you have student loans or other financial aid. Learn what happens to your financial aid when you drop out, so you know what you need to repay and when.

When you leave college before graduation, your loan status changes, and you’ll soon need to start making payments. Students often consider dropping out because of financial concerns regarding student loans, but they might not realize that they’ll need to start paying soon after.

With certain types of loans, you may be eligible for a grace period before that happens.

When figuring out how to drop out of college with the least financial impact, consider your loan type. Most federal student loans allow a six-month grace period before you have to start making payments after leaving school. This period gives you time to get your finances in order and find a job to cover your expenses.

Both subsidized and unsubsidized loans offer a six-month grace period. However, unsubsidized loans will continue to accrue interest. If you have a subsidized federal student loan, you’re not responsible for the interest until the grace period ends. Direct PLUS loans also come with a six-month grace period and interest that accrues during this time.

Private lenders handle private student loans, so loan agreement terms vary widely. Depending on the lender, you may get a grace period of up to six months before you must start making payments.

Alternatively, you may have a shorter grace period than federal student loans. Interest will still likely accrue during this time, so your loan balance will be higher. Check your loan agreement or contact your lender to see what happens to your private student loans if you withdraw.

Dropping a class in college doesn’t automatically impact your student loans. You typically only trigger early repayment if your enrollment drops below half-time status. However, each school has its own policy on federal financial aid eligibility requirements.

Withdrawing from a class could impact your satisfactory academic progress, which schools use to determine eligibility for graduation. Check with your registrar or financial aid office to understand any potential impact on your student loans and graduation qualifications.

If you go from full-time to part-time status, then your federal aid amount, including loans, will be adjusted to cover the reduced costs of your course load.

However, dropping below half-time enrollment often makes you ineligible for federal financial aid, including federal student loans. Some private lenders also have enrollment requirements that can impact your eligibility. Once this happens, your lender switches your status to withdrawn and your repayment period begins (unless there is a grace period).

Unfortunately, student loan forgiveness is hard to come by for both federal and private student loans.

However, even if you don’t graduate from your program, you could still qualify for the Public Service Loan Forgiveness (PSLF) program for federal student loans. You must work full-time at an eligible employer (typically in the government or nonprofit sector) while making 120 student loan payments in a row.

Student loan forgiveness might not be an option for everyone. But if your student loan payments become unmanageable, several repayment options exist.

Avoid navigating this experience on your own. You can find out who their lender is by going to studentaid.gov and logging into their accounts. Then, call your lender and ask what type of repayment options are available. They may be able to work with you, especially if you’re going through a temporary financial hardship. Reach out sooner rather than later so you don’t incur unnecessary late fees.

Federal student loan borrowers may be eligible for an income-driven repayment plan (IDR). IDRs essentially calculate your monthly payment as a percentage of your income. These plans lower your monthly payment but stretch out the repayment period, which can result in paying higher interest over time.

Borrowers with federal student loans may also request to enter forbearance during periods of financial hardship. Forbearance pauses payments on your loan for 12 months at a time, although interest will continue to accrue.

Since the COVID-19 pandemic, all federal student loans have been automatically placed in forbearance with a pause on interest. Student loan payments are set to resume on December 31, 2022. Under the Biden-Harris Administration’s student loan forgiveness plan, those with federal student loans obtained before June 30, 2022, may qualify for loan cancellation.

Student loan consolidation or refinancing could help with your payments. You can consolidate federal student loans into one easy payment. However, it doesn’t change how much you owe or your interest rate — the program uses the weighted average of your current rates for each loan.

With private student loans, refinancing could lower your interest rate, especially if your credit and income have improved.

Wondering what happens to your financial aid if you drop out? Leaving college early impacts other financial aid beyond student loans.

It depends on the type of college grant and when you drop out of school. You don’t need to repay federal student grants if you drop out after completing 60% of the semester. Otherwise, you’ll be required to repay some or all of the grant. If you can, it’s best to wait until you reach that 60% threshold to avoid repaying the funds.

Having to repay a scholarship depends on the award’s stipulations. You may need to repay the funds if you don’t finish your program, but it’s best to check the terms of the award for details. You should also check with your financial aid office, as every school will have different terms and conditions.