Student loans lenders, both public and private, take it seriously when thousands of dollars are given to help fund your college dreams. They expect to get those funds plus interest back at some point in the future.
While student loan borrowers recognize this truth, there are circumstances that make it more difficult to repay student loan debt than planned. When that happens, you may fear debt collectors are headed your way, and hiding from the issue may be your first instinct.
However, defaulting on your student loans can have significant consequences on your financial life, making it necessary to avoid these issues at all costs. Your credit score could take a hit, or worse, you could face a court order to have your wages garnished.
Fortunately, there are several options for borrowers who can’t pay student loans. This guide offers details about what you should—and should not do—if you’re finding it difficult to keep up with your student loan repayment.
What You Should Not Do
Before we dive into your options for help with making student loan payments, it is necessary to know what you should avoid doing to ensure your financial well-being stays intact.
First, do not ignore the issue. Some borrowers think simply missing payments means the lender will give up on collecting on the debts owed or that they will offer some relief to the borrower without communication.
This isn’t the case.
Lenders expect to be repaid as agreed, even if you’re facing financial hardship. Missing payments wreaks havoc on your credit and could affect your future financially for years to come, even if you are able to start making payments again later on.
What Happens When You Don’t Make Payments
Ignoring the fact that you can’t keep up with your student loan debt and missing payments without informing the lender as to what your circumstances are will lead to negative ramifications for your credit score and other aspects of your finances. Here’s what takes place:
- You miss one month’s payment: the lender reports to the three credit reporting agencies that you are late. This can drop your credit score by several points.
- You miss two months of payments: the lender reports your delinquency to the credit bureaus, again causing your credit score to drop.
- You miss three or more months of payments: the lender continues to report your delinquency to the credit bureaus. At this point, you may also face an official default on your student loans, meaning you could be facing wage garnishment.
- If you continue to avoid your student loan payments after serious delinquency has set in, your account could be transferred to a collections agency. When this happens, you will not only have a delinquency on your credit report, but also a collections account that remains there for several years.
Each of these consequences of missing student loan payments can make it difficult to get other credit, like auto loans and mortgages, in the future. Lenders will view you as a high-risk borrower and they will either charge you more for new accounts or decline your application altogether.
At a minimum, it is necessary to reach out to your loan servicer when you are having a tough time making your monthly payments. In most cases, they will inform you of the options you have for managing the issue, and possibly without a ding to your credit.
Repayment Plans If You Can’t Afford Your Payments
For borrowers with federal student loan debt, there are a handful of options that may be beneficial when payments are difficult to make each month. Repayment plans offered by federal loan servicers allow borrowers to pay a smaller amount each month, often based on income. These can drastically reduce the amount required for the minimum monthly payment as compared to the Standard 10-Year Repayment Plan.
Before considering a new repayment plan, it is important to understand some of the downsides you may face. Plans that extend your repayment term will cost you a lot more in the long run in most cases as more interest will be charged over the life of the loan.
If you choose an income-driven plan, you will also need to re-certify your income each year. This means your required payments can fluctuate year over year. Also, you may have an opportunity to have your student loans forgiven at some point in the future, but this could be a taxable event.
Income-Driven Repayment Plans
As mentioned, there are various income-driven repayment plans that limit your required monthly payment to a percentage of your income. Each varies slightly, so it is important to consider which makes the most for your financial situation.
Income-Based Repayment Plan (IBR)
Under the Income-Based Repayment Plan, or IBR, borrowers are limited to a monthly payment no more than 10 percent or 15 percent of their discretionary income, depending on when the loans were disbursed. The payment amount can never be more than the Standard 10-Year Repayment Plan amount. Any remaining balance will be forgiven after 20 or 25 years of on-time payments.
Pay As You Earn (PAYE)
Under the Pay As You Earn (PAYE) Plan, borrowers’ loan balances will be forgiven after 20 years of qualifying payments. Similar to IBR, the monthly payment can be no more than 10 percent of discretionary income, and it is never more than the 10-year standard repayment plan amount.
Revised Pay As You Earn (REPAYE)
The Revised Pay As You Earn (REPAYE) Plan allows borrowers to reduce their monthly payment to no more than 10 percent of discretionary income. There is no stipulation that this amount cannot be more than the 10-year Standard Repayment Plan. This program allows for forgiveness after 20 years for qualifying payments for undergraduate loans and 25 years for graduate loans.
Income Contingent Repayment (ICR)
Under an Income Contingent Repayment Plan, borrowers’ loan balances will be forgiven after 25 years. The monthly payment is calculated as the lesser of 20 percent of discretionary income or what would be paid for a 12-year fixed payment plan.
Extended Repayment Plan
There are also plans that allow for lower monthly payments that aren’t dependent on borrowers’ income. With the Extended Repayment Plan, borrowers may have up to 25 years to repay their loans, greatly reducing their monthly payments.
Graduated Repayment Plan
With the Graduated Repayment Plan, borrowers can still pay off their loans in 10 years, but payments will start lower and gradually increase over time. This plan makes sense for borrowers who start with a low salary at their job but expect to make more over time. Even though borrowers will still repay their loans in 10 years, they will still pay more than the Standard Repayment Plan.
Student Loan Forgiveness
Borrowers with federal student loans may also have access to forgiveness programs that can help solve the issue of struggling to keep up with monthly payments. With federal loans, forgiveness or cancellation is available to borrowers who work in public service through the Public Service Loan Forgiveness program, so long as certain requirements and a minimum number qualifying payments are met. Public service, in this case, may include:
- Police Officers
- Members of the United States Military
- Peace Corps Volunteers
- Medical Technicians
- Child Services Workers
Any remaining balance left after making 120 qualifying monthly payments are made may be forgiven, but be sure to check with your lender to see if you are eligible.
Federal Student Loan Consolidation
With federal consolidation, you will not save money over the long run; however, you gain some temporary relief from payments be simplifying your loan payments. You can extend your loan repayment term, lowering your monthly payment. You may also look into your options for income-driven repayment plans with a consolidated loan.
Student Loan Refinancing
With student loan refinancing, the same process takes place, except with a private student loan lender. Both federal and private student loans are eligible to be refinanced and all loans can be consolidated in the process.
When you refinance, you may be able to select a longer repayment term, helping lower your monthly payment. You may also receive a lower interest rate, which can save you money for the life of the loan.
Unlike federal student loan consolidation that does not require a check of credit, student loan refinance lenders have more strict eligibility requirements. If you have bad credit or low income, you will likely not qualify for a refinance loan. Also, you lose valuable protections like access to income-driven repayment plans if you refinance federal student loan debt with a private lender.
Deferment and Forbearance
If you have federal student loans, you may also consider your options for deferment or forbearance. With a deferment, your student loan payments temporarily stop after a request is made. The timeframe for the deferment depends on your circumstances, and you may qualify for interest to stop accruing on your loans during that period if you have subsidized loans. Your loan servicer can provide more information about the type of deferment available to you.
As an alternative, forbearance may also be an option. A forbearance on your student loans is similar to deferment except interest will continue to accrue in all cases. In addition, forbearance may be easier to qualify for as a federal student loan borrower.
As with a deferment, stopping payments with the help of forbearance can be requested through your loan servicer.
What About Private Student Loans?
Although federal student loans make up the lion’s share of student debt among today’s borrowers, some may also have private student loans.
>> Read More: Repayment options if you need private student loan help
Student loans from private lenders are often available at higher loan amounts than federal student loans, helping cover any gap in funding a student may receive experience. However, private student loans do not have the same options as federal student loans if you find yourself struggling to keep up with payments.
Some private student loan lenders do not offer forbearance or deferment when financial hardship strikes, though some do.
Borrowers and their cosigners may still be on the hook for making payments per the original loan agreement. Similarly, private student loan lenders typically do not offer any comparable options to federal income-driven plans.
Some private student loan providers may allow you to skip a payment or two if you’re having financial trouble, but this is not common. In some cases, it may be necessary to refinance your private student loans into a new private loan, lowering the interest rate, extending the repayment term, or both. Taking this step requires strong credit or a cosigner to qualify, but it may be a viable option if you need to lower your student loan payments for an extended period.
The most important piece of this puzzle is to get in contact with your private student loan lender as soon as you know the payments are going to be an issue moving forward. They will be able to provide you with the options you have to get assistance, if available.
Being unable to pay your student loans, whether private or federal, is a scary situation to find yourself in, but avoiding the issue is not an option.
Instead, work with your lender or servicer to understand the remedies available to you when your monthly payments become burdensome. Both federal and private lenders offer different strategies for keeping you out of default and helping you avoid negative consequences of missed or seriously delinquent payments.
Be sure to contact your loan servicer as soon as you recognize the issue to see what repayment options are available for you.
Author: Melissa Horton
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