The bills pile up while you await your next paycheck. You have to pay your rent/mortgage, utilities, buy groceries, and the list goes on. Your student loan payments are probably at the bottom of the list. While you might be tempted to not make your student loan payments, it’s important to manage your student loans even if you are unable to pay them right now so that you don’t default on them.
If you default on a federal student loan, the consequences can be severe. After 9 months of missed payments, a federal loan enters a default status, and the government can now pursue you to the day you die. They can seize federal benefits, intercept tax refunds, and garnish wages. You can also owe collection charges and fees.
Consider these options if you are unable to pay your student loans.
1. Loan forgiveness
Through the Public Service Loan Forgiveness program, after a 10-year period, if you have a federal student loan and you work in the public service sector at a qualifying government or nonprofit agency, your loans may be forgiven. If you are on an income-driven plan, you can qualify for loan forgiveness if you make qualifying monthly payments for 20 – 25 years.
2. Change your repayment plan
If you struggle to stay current with your federal student loan payments, you might want change your repayment plan. The majority of federal student loans qualify for income-driven plans that will cap your monthly payments at 10% – 20% of your discretionary income.
The Federal Student Aid website defines your discretionary income as the difference between your income and up to 150% of the poverty guideline for your family size and the state you reside in. This means that you could have a zero dollar monthly payment until your discretionary income goes up.
For you to qualify for income-based repayment and the Pay As You Earn program, you have to be able to prove partial financial hardship.
The Federal Student Aid website says, “Generally, you will meet this requirement if your federal student loan debt is higher than your annual discretionary income or represents a significant portion of your annual income.”
The date you took out your loan also plays a role in determining eligibility.
If you do not qualify, then instead you can choose the income-contingent repayment plan, which bases your monthly payments on your family size and the type of loan you have. Use this official repayment estimator to calculate your payments before you switch to this plan, because occasionally your payments could be actually be larger than they are under the 10-year standard repayment plan.
When you choose an income-driven plan, you can make your payments more manageable by lowering their amount. You will likely pay more interest with these plans, but when things are tight and you are having trouble making your payments, they can be a real life-saver.
3. Immediately contact your loan servicer
If you are unable to make your student loan payments, rather than ignoring your federal or private loans, consider immediately contacting your loan servicer and letting them know. The loan servicer can then discuss options with you, and they can help you keep your loans in good standing. Take these steps to avoid student loan default.
4. Consider consolidation
If you have trouble keeping up with multiple monthly payments, consider looking into consolidation. If you have a federal student loan, you can apply for a Direct Consolidation Loan to combine all of your loans into a single loan from one lender and with one payment.
The majority of federal student loans qualify for consolidation, and there are no application fees. However, private student loan holders do not qualify for a Direct Consolidation Loan. If you have a combination of private and federal loans, your federal loan portion can be consolidated.
Consolidation can offer you a maximum of 30 years to pay your loans off, and your new monthly payment will likely be less than you are paying now. However, you could land up paying more interest over the loan’s term and you could lose some of your benefits such as cancellation benefits or discounted interest rates. Make sure you weigh the pros and cons before you consolidate.
5. Consider forbearance or deferment
If you cannot repay your student loans because of economic hardship or you are not able to find work, you might be able to defer your federal loans for a maximum of 3 years.
The process of temporarily postponing your student loan payments is called deferment. The federal government might even pay the interest on your loans while they are being deferred, depending on the kinds of loans you have, such as the Direct Subsidized, Federal Perkins, and Subsidized Federal Stafford loans. You will have to submit a request to your loan provider if you want to defer your student loans.
If you do not qualify for deferment, you may still be eligible for forbearance, where you able to postpone your payments or reduce them for a maximum of 12 months. For example, if financial hardship or illness hits, your lender will decide if they will approve your application for forbearance.
You must request forbearance or deferment and you have to keep making your payments until approval is granted.
If you currently are not able to pay your student loans, the best thing you can do is contact your loan provider to talk about what your options are. Not taking action will have a negative impact on your credit score and your financial life. It can be stressful to be struggling with your student loan payments, but thankfully there are options.