The best way to stay out of trouble with your private student loans is to stay on top of your payments. That sounds simple, but how do you do that?
It starts with making a budget and sticking to it. You may need to continue living like a poor college student for a while and put off major purchases, but it is far better to never put yourself in a situation where you can’t make your student loan payments.
Even then, you might still face trouble.
Unplanned, bad events still happen. You may lose your job, face serious illness, or struggle with an unexpected financial disaster. In those cases, you’ll need to know what options you have if you can’t pay your student loans.
Since private student loans have less options for financial hardship than federal student loans, it’s crucial to weigh your options and make the right decision.
When You Need to Pause Your Private Student Loan Payments
Student loan forbearance is a temporary suspension in the obligation to pay on a loan. During this time, the lender may reduce or suspend your loan payment for a specified period of time. While a loan is in forbearance, interest continues to accrue on the outstanding balance.
You will ultimately end up owing more on your loans with a higher payment when forbearance ends, but it is a good option if you cannot make a payment for a short period of time.
Forbearance options on private student loans are limited when compared to federal student loans. If available at all, the forbearance period is short and may involve a fee.
Similar to forbearance, deferment is a temporary suspension in the obligation to make monthly payments on a loan. Additionally, deferment options are limited in the private sector, so you need to find out if deferment is even an option.
Unlike forbearance, deferment suspends payments as well as the accrual of interest. This is only true for certain types of loans, and the distinction is only prevalent with federal student loans. To know more about this option, check with your private lender.
When You Need to Lower Your Student Loan Payments
Interest-only payments allow a borrower to pay only the monthly interest that accrues on the loan each month. The outstanding balance does not go down, but it does not go up either since you are paying the accrued interest. Unless you have been making payments on your student loan for many years, the interest-only payment won’t be too much lower than your standard payment. This is due to the fact that nearly all of your monthly payment goes towards interest during the first few years of repayment. Some private lenders do allow interest-only payments for a short period of time.
Rate Reduction Programs
Most lenders offer some form of incentive for borrowers to sign up for automatic monthly payments. In exchange for enrollment, the lender reduces the interest rate on the loan by 0.25-0.50 percent. The difference in your monthly loan payment may be minimal, but it could add up to significant savings down the road.
Graduated Payment Plans
Graduated payment plans require small loan payments, often interest-only payments, in the first few years. The required payment increases at regular intervals. The payment pattern is designed to mimic the expected salary pattern of a new college graduate. Private student loans, however, typically don’t offer graduated payment plans.
Refinancing Your Student Loans
If you have not refinanced your student loans, this may be a good option to reduce your monthly payments. By refinancing your loans, you may be able to lock in a lower interest rate or request a longer maturity term. Both of these options will help with private student loans.
When You Really Can’t Make Your Payments
Under normal circumstances, student loans do not go away as part of a bankruptcy proceeding. In other words, most student loans are exempt from the bankruptcy process. If you cannot make your student loan payment and have other debt, however, getting rid of the other debts in bankruptcy can make it easier for you to make your student loan payments. Bankruptcy, however, should be a last resort since it can negatively impact your credit for years to come.
Although student loans are generally exempt from bankruptcy proceedings, there are special circumstances under which you can appeal a court to discharge the debt. You would need to provide evidence showing that the debt is creating undue hardship following extreme extenuating circumstances that are not expected to change in the future. However, this is a highly unlikely option.
Settling the Debt
If you are in a situation where you have not made payments on your student loan for a while, your debt is likely to end up being transferred to a collections agency. The lender can go to court to get a judgment levied against you for payment of the debt, and the judgment can allow the lender to garnish your wages to meet your obligations. During that process, however, it may be possible to negotiate a smaller payment or settle the debt for a percentage of what you actually owe.
Author: Kimberly Goodwin, PhD
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