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Advice for College Drop Out: Loan Money, Taxes and Finances

written by: Ivy N. McQuain MBA•edited by: Wendy Finn•updated: 3/31/2011

It is possible that you have reached the end of your rope as far as your college career is concerned and you are ready to drop out of college. Before you let go and end your college career you should know that you may end up paying more for not completing your college education.

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    Did you know that when you drop out of college and you have student loans you may trigger immediate loan repayments? Millions of students who begin their college career often drop out for a number of reasons, but those who take out loans may put themselves in a negative position with lenders. If you are determined to drop out of college and have loan money, then you need to ask yourself the following questions:

    • Can you afford to begin repaying your loan today?no-money 
    • Do you have the desire to complete your college career in the future?
    • Can you wait until the end of the semester before dropping out of college?
    • Will you have interest and taxes on your loan?
    • How will loan repayment impact your finances?
    • Will dropping out impact you from getting a new loan?

    Of course, this is not the entire list of questions to ask yourself when you are considering dropping out of college, but you need to fully understand the financial implications you will face when dropping out.

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    What You Need to Know

    Financial Obligation

    When you entered into your loan agreement you signed a promissory note stating that upon the completion of your degree, or if you no longer attend college, that you would begin the repayment process. To drop out of college and have loan money owed means that you have to make provisions to pay a bill that would be deferred while you completed your education. Dropping out of college accelerates your loan repayment… are you ready for that? Ebony Holmes, a Student Financial Aid Specialist 3 at the Louisiana Office of Student Financial Aid says, “When you drop out of college and owe loan money, the lending institution in conjunction with the federal government will garnish your wages and restrict and revoke professional licenses you may have acquired.”

    Interest and Taxes

    Loan interest rates are can be between LIBOR + 2.50 percent (2.87 percent APR) to LIBOR + 10.875 percent (10.33 percent APR) per $1,000 (Sallie Mae, 2011). The interest range can increase dramatically per lending institution. “If you drop out of college and your loan money is not paid, and you expect to receive a refund from filing your taxes, it will be taken as repayment,” Holmes says. “This applies to your federal and state taxes.”

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    Your Finances

    Your Loan Money

    Not repaying your loan will impact your finances one way or another. If you drop out of college owe money to a lending institution, then you may jeopardize your ability to receive future loans when you are ready to continue your education. You will negatively impact your credit score. You will not receive transcripts and you may be charged collection fees up to 25 percent depending on the collection agency. "Don’t let your loans go into default, because doing so will impact your loan money and options in the future,” says Holmes. “A defaulted loan results in an I-9 credit score which is the worst credit score possible.”

    So before you drop out of college and owe loan money, you need to consider this last thing: Are you financially able to afford the detriment to your finances, taxes and future loan opportunities?

    Resources:

    Louisiana Office of Student Financial Aid. 2011. Interview with Ebony Holmes

    Loan Requirements. 2011. Sallie Mae. http://www.salliemae.com.

    Image Credit: Free Digital Image. http://www.freedigitalphotos.net/images/Other_g374-No_Money_p17788.html. Photographer: graur razvan ionut.