Debt Help Student Debt

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

For example, let’s say you have $35,000 in loan debt at an interest rate of 6 percent. You’re single and making $30,000 a year. On a 10-year repayment plan, your payments would come to $389 a month. Because of your income, you may be able to knock your payments down to $103 a month instead.

Income-dependent repayment plans give you up to 25 years to pay off your loans, after which the remaining balance would be forgiven but you shouldn’t make the mistake of taking that long to wipe them out. Going back to the previous example, an income-based plan could cost you nearly four times as much in interest over the life of the loan.

While you wouldn’t necessarily feel the pinch on a monthly basis thanks to the lower payments, that’s a huge chunk of change that could be going towards retirement or other financial goals.

Check to See If You’re Eligible for Loan Forgiveness or Cancellation

Aside from restructuring your repayment plan you should also consider whether getting your loans forgiven or cancelled is a possibility. The Public Service Loan Forgiveness Program, for example, offers forgiveness for federal borrowers who work in a public capacity and make 120 on-time payments towards their loans.

While you’ll still have to shell out something towards your debt, you can enroll in an income-based plan to minimize what you’re paying.

Forgiveness is also available for borrowers who work in certain fields, such as nursing or education and through nonprofit organizations like the Peace Corps or AmeriCorps. Many private companies offer forgiveness programs so it’s worth it to check with your employer to see what kind of relief may be available.

You can and should look into cancellation of your loans if extenuating circumstances apply. For instance, you may be able to get your loans discharged in full if you can’t pay because you’ve become totally and permanently disabled and are unable to work. You may also be eligible for a discharge if the school you attended has closed.

If You’ve Already Defaulted on Your Loans

Generally, you’re not technically in default on your student loans until you’ve missed between six and nine payments, depending on the lender. At this point, your credit is likely to be peppered with black marks and your loan servicer may be sending you threatening letters on a regular basis.

Since you could be subject to wage garnishments, seizure of your tax refund or even a lawsuit at this point, it pays to act quickly to resolve the issue.

If you took out federal loans, there are two things you want to do. First, you can try consolidating your loans. This just means rolling all of your debt into a single loan with one fixed rate. The advantage of consolidating is that it can reduce your interest rate and bring your payments down so they’re more affordable.

Typically, the Department of Education requires borrowers who are in default to make three consecutive, on-time payments before you can apply for a consolidation loan.

The next step is to see if you’re eligible for loan rehabilitation. This involves working with the Department of Education to negotiate a reasonable repayment plan. Generally, you have to make at least nine payments on time before the default is reversed but once your loan is rehabilitated, you’ll be able to take advantage of deferment, forbearance and income-based repayment options once again.

Not only that but the default status is removed from your credit report, which can help boost your score if missed payments caused it to take a serious nosedive. Getting out of default when you have private loans is a little trickier since private lenders aren’t required to offer the same repayment options as the federal government.

Again, your best bet is to contact the lender directly to see what kind of help is available but if your options are limited, refinancing can make your loans a little easier to manage.

Refinancing private loans is similar to consolidation in that you can streamline your payments and reduce your rate but there’s a catch. Since you’re going through a private lender your approval is based in part on your credit report and score. If your score is looking dismal, you’ll likely need a cosigner to come on board before you can get the ok for a refinance.

Final Word

Missing a student loan payment can have long-lasting repercussions so it’s vital that you be proactive when you’re at risk of not being able to pay. Digging your way out of default after the fact is much more difficult so if you’re worried about missing a payment, don’t procrastinate about finding a solution now.

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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