What to Do if You Can’t Pay Your Student Loans

Student loans never go away. And failing to pay back your student loans can have significant negative consequences. Your credit rating will likely be damaged, making it more difficult for you to borrow money, rent an apartment or even secure a good job.

If you have a private student loan, your lender may take aggressive action to pressure you to repay, including sending your account to a collection agency.  If you have a federal student loan — as almost 90 percent of all student loans are — the government has even more powerful tools to use against you if you don’t make your payments, including garnishing your wages, seizing a tax refund or portions of federal benefits, and denying you eligibility for new grants or loans. In addition, the government can place liens on your bank accounts and property.

Many people discontinue payments for educational loans after suffering a setback which leaves them underemployed or unemployed. Without a sufficient income, setting aside loan payments falls to the bottom of a priority list that must account for vital living expenses. Still, you have options during this volatile financial period.

If you either have low income or zero income, you may qualify to defer your loans or put them in forbearance status. Both of these options provide a temporary reprieve from making payments, as well as protecting your credit score. The record of your loan status changing will be included in your credit score, but the number will not decrease.

However, if you default on your loans — where you do not make any payments and your loans are not in deferment or forbearance — the results can be severe. Your credit score will decrease and employers will have the option of using this information as a factor in choosing whether or not to hire you. A lower credit score may be seen as an indication that you will lack reliability as an employee.

Another result of defaulting and failing to communicate with lenders is having a portion of the money you earn automatically deducted from your paycheck. Your loan servicer has the right to communicate with your employer to determine your income and either garnish your wages (deduct a portion of them to go to loan repayment) or take your tax return. You can prevent this from happening be contracting your loan servicer and seeking to change your repayment plan.

Communication with loan servicers can be the key to protecting your credit and managing your finances. If you experience a job change that enables you to return to making payments, let your loan servicer know. The loan servicer can then take you through the steps to determine your monthly payments and return your loan status to “in repayment.”

Whether you do find yourself underemployed or unemployed, the worst thing you can do is to ignore the problem. If you are among the 4 million Americans who have defaulted on their student loans (more than nine months behind), you need to face the problem and consider your options, including loan modification, deferment, forbearance, repayment plans, forgiveness and consolidation.

Student Loan Modification

If your loan is private, and you are having difficulty meeting your payments, your only choice is to contact your lender and try to work out a loan modification. Private lenders are under no obligation to renegotiate the terms of your loan, but often they would rather help you than see you default on your loan. If you are having problems with your private student loans, you can contact the private student loan ombudsman at the federal Consumer Financial Protection Bureau. The ombudsman can help you resolve problems and disputes, including complaints about payment problems, confusing advertising and marketing materials, deferment and forbearance issues, debt collection problems and credit reporting problems.

Student Loan Deferment

For borrowers with federal student loans, many options exist if you are unable to meet your obligations. One option is to apply to your loan servicer for a deferment.

A deferment will excuse you from making payments for a set period of time, as long as you are:
  • Enrolled in school at least half-time.
  • Unemployed and seeking employment.
  • Suffering economic hardship.
  • Serving on active duty in the military, or
  • Serving in the Peace Corps.

If you qualify for a deferment on a federally subsidized loan, you will not have to make payments on the loan’s principal during the deferment period, nor will interest accrue. Generally, you cannot qualify for a deferment if your loan is in default; however, in some cases a retroactive deferment may be available. To apply for a deferment, you need to contact your loan holder and submit the appropriate forms.

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Student Loan Forbearance

Another option you can explore is loan forbearance. In forbearance, you receive permission to stop making payments for a set period of time, or your payments are temporarily reduced. Interest will continue to accrue during forbearance, however.

Forbearance of federal loans are usually granted for the following reasons:
  • Health or unforeseen personal problems.
  • Inability to pay your debt within the maximum repayment term (usually 10 years).
  • Monthly loan payments total more than 20 percent of the borrower’s monthly income.

Generally, forbearances are easier to obtain than deferments. Loan forbearances are generally granted for up to one year at a time, and you may be able to get a forbearance even if you are already in default.

Student Loan Repayment Plans

The standard repayment term is 10 years, and under this plan you pay a fixed amount each month. However, if the standard plan is too onerous, and you need to make smaller monthly payments in order to avoid delinquency or default, you can apply for a different repayment plan.

Under the extended repayment plan, you can have up to 25 years to repay your loan. However, even though your monthly payment will be lower, you’ll pay more in the long run because of the interest that accumulates during the longer repayment period.

Under a graduated repayment plan, your payments will start out low and increase every two years, until you reach the end of the standard 10-year repayment term. This option can be a good one if you expect your income to increase steadily over time.

Income-Based Repayment Plan

The income-based repayment plan (IBR), which took effect in 2009, can cap your federal loan payments at a percentage of your income, and forgive any debt remaining after 25 years of affordable payments. Forgiveness may come after just 10 years of payments if you are employed in certain public and nonprofit professions. To qualify for IBR, you must be able to demonstrate a financial hardship like job loss, illness or suffering losses due to a natural disaster.

Many people do not realize that their payment could be as low as $0 per month on an income-based repayment plan, if their income is low or household size is large. Additionally, zero dollar payments on IBR do count as payments toward loan forgiveness.

Income Contingent Repayment Plan

The income-contingent repayment plan for Direct student loans, and the income-sensitive repayment plan for the Federal Family Education Loan Program, also provide repayment options based on income. You can find more details about these plans on the Guide to Federal Student Aid website.

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Student Loan Forgiveness

In some cases, federal student loans can be forgiven in full or in part. Conditions for loan forgiveness include:
  • Becoming a teacher or other public service professional under specific guidelines.
  • Service in the U.S. Armed Forces.
  • Closure of a college before completion of studies.
  • Fraud or malfeasance on the part of an educational institution.
  • False certification as a result of crime or identity theft.
  • Total and permanent disability.
  • Death.

Another way in which a student loan can be completely discharged is through a declaration of bankruptcy, although a borrower must be able to prove “undue financial hardship” in a bankruptcy court.

Courts use different tests and may consider some or all of the following criteria:
  • You cannot maintain, based on current income and expenses, a minimal standard of living, if forced to repay the student loans.
  • Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the loan.
  • You have made good-faith efforts to repay your loans.

Student Loan Consolidation

Finally, if you are having trouble keeping track of multiple student loan payments, you can consider loan consolidation. A loan consolidation allows you to roll several student loans into one new loan, possibly with a lower interest rate. But if your new consolidation loan has a longer repayment term, understand that while your monthly payments may decrease, your total repayment amount may increase because of the added interest over time.

Most private loans and federal student loans can be consolidated — although not together — and there are detailed guidelines for each one. You should contact your lender or visit the government’s student loan website for specific information.

Cecillia Barr

Cecillia Barr is a graduate of the University of Central Florida. She blogs about her extensive knowledge on student loans in order to help others reduce their debt and live financially independent lives.

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