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Student loans are a complex issue. National student loan debt has now reached a staggering $1 trillion. While various solutions have been proposed, the reality is that many people are facing difficulty in repaying their loans. If you're one of them, it's important to know what your options are.
If you're unable to make your monthly student loan payments, we've compiled a list of actions you could take. We're not going to suggest how you should alter your budget, secure a better job, or make personal sacrifices. However, if you're interested in those topics, you may find these resources useful:
Should I Relocate to Another City to Find Employment?
How to Cut Costs and Save Hundreds Without Living Like a Hermit
A Guide to Navigating Unemployment
SponsorChange Allows You to Pay Off Your Student Loan Through Volunteer Work
In the meantime, we assume you've already explored every possible avenue. If you're still struggling, here are the options available to you.
Don't Overlook Your Loans
Neglecting your student loans is one of the worst decisions you can make. It's important to avoid falling into delinquency, and even more critical to steer clear of defaulting on your loans.
Being delinquent means you've missed a payment. Here's what follows:
Your credit score will take a hit.
You’ll incur a late payment fee.
And here's what happens when you default, according to the legal site Nolo:
Your tax refund may be taken.
Your wages may be garnished.
You could face a lawsuit.
If you're receiving federal benefits, they could be withheld.
An important point about student loans is that they are usually not dischargeable through bankruptcy. This means that if you file for bankruptcy due to overwhelming debt, your student loans will remain. While it's possible to get them forgiven during bankruptcy, the process is complicated and far from guaranteed.
Stay in Touch with Your Lenders
To avoid defaulting, it's crucial to maintain communication with your loan providers. While securing a student loan modification is challenging, it's worth asking about. In any case, the best approach when you're falling behind on payments is to reach out to your lender. As Debt.org explains:
Keeping in contact with your loan servicer is vital for safeguarding your credit and managing your financial situation. If your job situation changes and you're able to resume payments, inform your loan servicer. They will guide you through the process of adjusting your monthly payments and restoring your loan to 'in repayment' status.
After explaining your situation, find out if you qualify for and/or are interested in the following options.
Postpone Your Loan Payments
If you've lost your job or are experiencing financial difficulties, you may be able to delay paying both the principal and interest on your loan. The specific terms of deferment will vary depending on the type of loan and the available options. In some cases, the government might even cover your interest during this time.
Nolo outlines the most common reasons for deferment:
Enrolled at least half-time in school
Unemployed, actively looking for work
Experiencing financial hardship
On active duty in the military
Called to serve while attending school
Serving in the Peace Corps
To see if you qualify for federal loan deferment, visit the government's Federal Student Aid website. You can then download the necessary form. For private loans, reach out to your servicer to determine if you're eligible.
Consider Applying for Forbearance
If you're not eligible for deferment, you might want to explore forbearance. Like deferment, forbearance allows you to pause your loan payments for a specific time. The key difference is that while deferment typically stops interest from accumulating, forbearance continues to accrue interest. Check with your loan servicer to find out if you're eligible.
With both options, it's essential to understand what will happen to your interest during this period. Be sure to discuss the specifics with your servicer.
Explore Income-Based Repayment Plans
If your income is low and you have federal loans, you may qualify for income-based repayment (IBR). This will reduce your monthly loan payment based on your earnings. Below are the pros and cons, according to the Federal Student Aid website.
Pros:
Your monthly payment will be approximately 15% of your discretionary income.
If your IBR payment doesn’t fully cover the interest that accumulates each month, the government may pay the remaining interest.
Your loan capitalization is capped.
After a certain period, your remaining loan balance might be eligible for forgiveness.
Cons:
Overall, you may end up paying more in interest because the loan term is extended.
You will need to provide annual documentation.
If your loan is forgiven, you will still have to pay taxes on the forgiven amount.
Check out the IBR fact sheet to determine if you're eligible and learn how to apply. Another option is the Pay As You Earn (PAYE) plan. Like IBR, PAYE requires proof of financial hardship.
On her website, student loan expert Heather Jarvis explains the key differences between PAYE and IBR:
Only "new borrowers" qualify for PAYE.
Only federal Direct Loans are eligible for PAYE.
PAYE payments are smaller than IBR payments.
Loan forgiveness comes sooner with PAYE than with IBR (though both are taxable).
Explore Loan Forgiveness and Discharge Options
In certain cases, the government will forgive all or part of your loan. Marketplace categorizes these programs into four main groups:
Community service: Programs like AmeriCorps, the Peace Corps, and Volunteers in Service to America may qualify you for loan forgiveness.
Military: Certain programs offer loan forgiveness, while others cover your education costs while you're serving.
Profession: Some professions, especially in health and education, have forgiveness programs for workers. Visit FinAid for additional details.
State-specific: Some states provide forgiveness incentives for residents. For example, Kansas will contribute $15,000 to your student loans if you live there for five years. Check out Tuition.io's article on cities that will help pay off your student loans.
In some rare cases, it might be possible to have your loan completely discharged. These situations are uncommon, but Marketplace lists several potential discharge options:
Closed schools: If your school shut down while you were enrolled (or soon after you left).
Disasters: If your spouse died or became disabled due to the 9/11 attacks.
Fraud: If the loan was taken out fraudulently in your name.
Medical: If you have physical or mental impairments.
What to Do if You've Defaulted on Your Loans
If it's too late and you're already in default, there are still some options available to you.
Consolidation
Loan consolidation allows you to get your loans out of default by refinancing them into a new loan. This means you'll have a fresh repayment schedule, and the interest rate could change.
If you decide to extend the repayment period, your monthly payments will decrease. However, remember that in the long run, you'll pay more due to the accrued interest. While it's a more manageable option than staying in default and paying nothing, it's still important to consider the overall cost.
For federal loan consolidations, visit the government's Student Aid website to check your eligibility and see how to apply. For private student loans, eligibility will depend on the lender, so make sure to reach out to them directly.
Rehabilitation
Rehabilitation offers a one-time chance to get out of default on federal student loans. As outlined by Consumer Finance:
...you can get your loan removed from default status by making a series of consistent (usually nine) on-time, reasonable, and affordable payments. Typically, you can only rehabilitate a loan once. This is the only method to clear the default mark from your credit report. If you choose to return to school, you'll also regain your eligibility for federal student aid after making the sixth of nine payments.
Clearly, these options may not be feasible or attractive for everyone, and none of them are easy. However, as tough as it may be, it's important to take whatever steps you can to avoid defaulting on your loans.
If sticking to your current payment plan isn't feasible, it's helpful to understand the other options that might be available to you.
