Debt Help Student Debt

What Do You Do When You Can’t Pay Your Student Loans?

Written by Rebecca Lake

Student loan debt has grown by leaps and bounds over the last few years and if you’re one of the Americans who financed your education, you know how serious of a problem it can be. It’s particularly troublesome for 20-somethings who are trying to find their place in a tight job market or have jobs but are stuck earning at the lower end of the pay scale.

If you’re struggling to keep up with your payments, you’re not alone. As of 2014, an estimated 7 million borrowers were in default on their loans, with the average overdue outstanding balance totaling just over $14,000. Falling behind on your loan payments can wreak havoc with your finances so if you’re teetering on the edge of default, here are some ways you can minimize the damage.

Call Your Loan Servicer for a Temporary Fix

Hiding from your loan servicer when you can’t afford to pay your student loans is a bad idea for a couple of reasons. For one thing, if you skip out on paying the lender will report it to the credit bureaus. Your payment history accounts for 35 percent of your FICO score calculation and late or missed payments can knock off big points. That can translate to higher interest rates down the road when you try to borrow or your application for credit could be denied altogether.

Besides that, keeping your lender in the loop can actually work to your advantage because loan servicers aren’t interested in seeing you default. In fact, you might be surprised to learn that they offer a number of options for helping you manage your debt when your income isn’t enough to cover your payments.

For instance, if you’ve only recently graduated you may be able to defer making payments beyond the initial grace period. During a deferment, no payment is due and no interest would accrue on the loans. You’d still have the option of making payments if that’s feasible for your budget but you wouldn’t be required to.

If you’ve used up your deferment period, then a forbearance may be a possibility. A forbearance is usually granted if you re-enroll in school or you’re experiencing a financial hardship and again, no payment is due. The one difference you need to keep in mind that interest will continue to add up on your loans during a forbearance period, which means your balance will be higher once you start making payments again.

Look into Income-Based Repayment Plans

Deferment and forbearance plans can help you out for a few months until you find a way to start earning more or lower your expenses but for some borrowers, that may not be enough. If you’re between jobs or you’re just starting your career, changing up your payment plan may be the better choice.

Unless your specify something different, your loan servicer will automatically put you on a 10-year repayment plan once it’s time to start paying the piper. While a standard plan minimizes the amount of interest you’ll pay, it also comes with a much higher monthly payment. Switching to an income-based plan allows you to mold the payments to your budget so you’re at less risk of defaulting.

About the author

Rebecca Lake

Rebecca Lake is a personal finance writer and blogger specializing in topics related to mortgages, retirement and business credit. Her work has appeared in a variety of outlets around the web, including Smart Asset and Money Crashers. You can find her on Twitter at @seemomwrite or her website, RebeccaLake.net.

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