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

    What to do if you can't pay your student loans?The “honeymoon” phase for most college graduates lasts exactly six months.

    That’s the grace period – the time before they must start repaying student loans — for the 72% of students who graduated with student loan debt in 2017. If you left school June 1 with student loan debt, be ready to write your first check on Dec. 1.

    And lenders don’t’ care if you’re employed or unemployed. They want to get paid. The honeymoon is over!

    So, what can you do if you can’t pay your student loans?

    The choices fall into a few categories:
    • Contact your loan servicer, explain the situation and try to arrange an affordable payment schedule
    • Cut expenses and increase income to generate enough money to make payments
    • Contact your loan servicers and sign up for an income-driven repayment plan
    • Consolidate your loans to lower monthly payments
    • Extend the “honeymoon” a little longer by seeking deferment or forbearance

    None of those look real attractive, but they are the tough choices more and more college graduates are facing while they try to take their first steps in the after-college world.

    Consequences for not Paying Student Loans

    Just over 1 million borrowers defaulted or re-entered default on student loans in 2016. That’s a 17% year-over-year increase. According to the U.S. Department of Education (DOE), an average of 3,000 borrowers a week fall into default in 2017.

    The DOE says that 10.7% of student loan borrowers – 4.6 million people – are in default, meaning they failed to make a payment in more than 270 days (nine months).

    By DOE accounting, $137.4 billion of the $1.4 trillion in student loan debt is in default.

    Some of the consequences for being in default include:
    • The balance of your loan, plus the interest, become due immediately
    • You can no longer receive deferment or forbearance
    • The notice of default will appear on your credit report and affect your credit score
    • Tax refunds and federal benefit payments (like social security) can be garnished
    • Your loan holder can take you to court

    And there is an even more frightening consequence on the horizon for some defaulted borrowers: You may lose your home.

    The federal government hires law firms to place liens on the homes and bank accounts of people in default and the result of that could be your home is foreclosed on.

    #1 Thing to Do If You Can’t Pay Student Loan

    The easiest way to solve a problem is to start at the source and in this case, that means your loan servicing company if you have a federal student loan or a bank, if you took out a private student loan.

    The loan servicers and banks make money is you simply follow the terms of your loan agreement and pay them back the money you borrowed. They lose money if they have to chase you all over to make those payments.

    So, it’s in their best interests to be helpful. They should provide you with information on various repayment plans that will make it easier for you to afford monthly payments. You could ask them to have a portion of every paycheck deducted to help meet your obligations.

    But be careful who you speak with and listen closely to what they say. Unfortunately, many loan servicers have come under fire for offering misleading or sometimes false information to borrowers that drives up the cost of repaying your student loan.

    For example, the federal government filed suit in January of 2017 against Navient, the largest servicer of student loans in the U.S. with 12 million customers who owe $300 billion. The suit alleged that Navient made serious mistakes in the collections process that cost consumers millions of dollars.

    Increase Income, Cut Expenses

    Two things anyone can do to help themselves out of financial stress is to find a second source of income and/or reduce spending in every category in their budget.

    There is money to be made taking a second job as a tutor, a coach, a freelance writer or even taking on the traditional side jobs as a waiter, pizza delivery or babysitting. Create a bank account where any money made on the side goes and use that to make payments on student loans.

    The added benefit of a second job is that you have less time to spend money on things like dining out, entertainment, clothes, etc. That means you already should be started cutting expenses in the areas where “want” so often supersedes “need.”

    Try a few more expense-cutting steps like getting a roommate to share rent/utilities/food expenses; using public transportation or walking instead of having the expense of a car; move home with you parents until you earn enough to afford expenses and student loan debt.

    These might feel like drastic steps, but there aren’t nearly as penalizing as defaulting on a loan.

    Enroll in Income-Driven Repayment Plan

    Unless you opt out of it ahead of time, everyone with a federal student loan is assigned to the Standard Repayment Plan (SRP), a program that pays off your debt in 10 years. It is the fastest and least expensive way to repay the loans, but also carries the highest monthly payment.

    The federal government has come up with several income-driven repayment plans to help graduates get on a more affordable schedule than the SRP.

    These programs including Pay As You Earn (PAYE), Repay As You Earn (REPAYE), Income-Based Repayment Plan (IBR) and Income-Contingent Repayment Plan (ICR). Filling out an application is all it takes to join one of these plans and you can move from one to another as it suits your purposes.

    The general outline for the four programs is that you will pay 10-15% of your “discretionary income,” depending on which program you choose.

    Discretionary income is defined as the difference between your income and 150% of the poverty guideline for your family size and state of residence. For the ICR Plan, discretionary income is the difference between your income and 100% of the poverty guideline for your family size and state of residence.

    Your monthly payments for any of these four plans should be less – sometimes significantly less – than what you would pay under Standard Repayment Plan.  For some people, the payment is as low as $0 per month. Any loan balance not repaid at the end of 20 or 25 years (depending on the plan you choose) is forgiven.

    Consolidate Student Loans

    If you received student loans for more than one semester of college, you probably have multiple loan servicers requiring multiple paychecks at various times a month, maybe at amounts you can’t afford.

    Applying for a Direct Consolidation Loan (DCL) could be answer.  A DCL allows you to roll several student loans into one new loan, with a lower interest rate

    It simplifies loan repayment by giving you a single loan with a single check due each month. It is a fixed rate and allows you to stretch your repayment period out to as long as 30 years, which means lower monthly payments.

    The DCL only applies to federal loans.  Private student loans can’t be consolidated in a federal Direct Consolidation Loan. To consolidate a private loan, you must consult with your bank or review the terms of the loan.

    Student Loan Deferment

    If all other options are exhausted and you just need time to figure things out, there is 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
    • Enrolled in a graduate fellowship program
    • In an approved rehabilitation program for the disabled
    • Unemployed and seeking employment
    • Suffering economic hardship
    • Serving on active duty in the military

    There also are deferments available if you have Perkins Loan and are a full-time law enforcement or corrections officer 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.

    Deferments also are available for some private loans, but you must contact your lender or review terms of your agreement.

    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 divided into two categories: General and Mandatory. General forbearances usually are granted for the following reasons:
    • Health or unforeseen personal problems that cause medical expenses
    • Change in employment
    • Inability to pay your debt within the maximum repayment term (usually 10 years)
    • Monthly loan payments total more than 20% of the borrower’s monthly income
    • Reasons acceptable to your loan servicer

    Forbearance is easier to obtain than deferments. Loan forbearances are 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.

    Loan servicers are required to grant mandatory forbearance if any of the following conditions are met:
    • You are serving in a medical or dental internship or residency program and you meet specific requirements
    • Total amount you owe per month for all student loans is 20% or more of your gross monthly income for up to 3 years
    • You are serving in AmeriCorps position for which you received a national service award
    • You are performing teacher service that would qualify you for teacher loan forgiveness
    • You qualify for partial repayment of loans under Dept. of Defense Student Loan Repayment Program
    • You are a member of the National Guard and have been activated by a governor, but not eligible for military deferment

    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.

    Though it is extremely rare, 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.
    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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