05/12/2015 02:39 pm ET Updated May 12, 2016

How to Prevent a Student Loan Default Before It's Too Late

With over 7 million student loan borrowers currently in default, it’s a fact that many people simply aren’t meeting their repayment obligations. So why are so many borrowers in default? Turns out there are a lot of different reasons.

They Dropped Out

The Federal Reserve Bank of New York found that students with the smallest debt obligations, between $1,000 and $5,000, are the most likely to default on their loans. Often, such a small debt burden means the student dropped out of college, cutting off his or her higher earning potential and making it harder to pay off student loans.

They Fear Debt

Many young graduates fear debt and try to pay off their loans as quickly as possible. This kind of repayment schedule can overwhelm graduates and increase the risk of default. Successful investor and engineering graduate Mohammad Majd realized that if he only made minimum payments, he would have enough money left over each month for other investments. This strategy gave him more options and netted him more money in the end, even with the additional interest of a longer repayment term.

They Got Scammed

Some borrowers are simply refusing to pay back the loans they took out to attend for-profit schools like Everest Institute or Wyotech and Heald College. These institutions recently lost their access to federal funds for deceptive marketing tactics, and for lying to the government about graduation rates. Some students feel completely taken advantage of by these programs and are refusing to pay back their loans, hoping to force the government to forgive their debt.

They Can’t Afford It

The most commonly cited reason for defaulting on student loans is the inability to afford monthly payments. If you believe your chance for default is high, there are preventative tactics to make sure you don’t suffer the consequences of a student loan default.

Some options to consider are:

  1. Forgiveness: The government offers a number of plans to help struggling borrowers reduce their obligations and monthly repayments, including loan forgiveness. The Public Service Loan Forgiveness Program forgives the debts of eligible borrowers who have worked full-time in qualifying public-service jobs. Loan forgiveness programs have been substantially expanded in recent years and are also offered on a profession basis.
  2. Talking to Your Lender: If you’re having trouble repaying your loans, you should talk to your lender directly. Federal loans have options such as deferment and forbearance as well as several repayment plans (e.g., Pay As You Earn, Income-Based Repayment) to help struggling borrowers repay their student debt. Private lenders will also work within their own guidelines to accommodate struggling borrowers.
  3. Refinancing: The student-loan-refinancing market has exploded in recent years. There are a number of private lenders competing to buy student loans and refinance them, ending in lower interest rates and lower monthly payments for borrowers. If you can’t afford your monthly payments, talk to a private lender about making them more manageable.

If your monthly student loan payment is taking a toll on your finances, defaulting will only make your situation worse. Explore one of the many options for reducing your monthly payments before you think about defaulting on your loan.

If you are interested in how you can lower your interest rate by refinancing your student loans, visit Credible.

States With Highest Average Student Debt - TICAS - Class Of 2012