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.
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.
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.