When your monthly student loan bill is higher than your rent, and the starter salary at your full-time job hasn’t seen a cost-of-living reality check since the mid-80s, you may find yourself with a student loan bill you can’t afford to pay.
Crossing your fingers and waiting for lawmakers to agree on comprehensive student debt relief plan is a non-option, and because, (for the most part), student loans cannot be discharged in bankruptcy, neither is ignoring the monthly bill.
Procrastinating payments could mean falling into default – destroying your credit, becoming a target for debt collectors, damaging the credit of your cosigners, having future tax refunds withheld and even having a portion of your paycheck garnished – yeah, it’s not pretty.
Instead of resigning yourself to total debt destruction, be proactive!
I know it’s not what you want to hear when you feel you’ve done all the right things to graduate and get a job and the wrath of overwhelming debt still bears down on you, but trust me, you can do more and it’s totally worth it!
Here’s breakdown of how to manage your student loan bill when you can’t afford it…
Call Your Lender
If you’re unsure of who your lender(s) is/are, use the NSLDS (National Student Loan Data System of Students) website to look up all your federal student debt obligations and get information regarding which agencies currently hold that debt.
If you have any private loans, your lenders may be listed on your credit report.
Be upfront and honest about your struggle to meet the terms of your loan repayment and see what alternate options you can negotiate – think, a lower minimum payment, a longer repayment timeline, a reduced interest rate, a new repayment plan – anything you can do to help you avoid default.
If you have good credit, you may be able to qualify for refinancing as low as 3.5% – check your eligibility here.
If you are unemployed, serving in the military, in grad school or in another position in which you cannot afford your loan payments, you may qualify for deferral on your federal loans.
Deferments are not automatic so you’ll need to submit a request to your lender to see if you qualify,
While you don’t have to make monthly minimum payments during deferment, unsubsidized loans will still accrue interest – meaning that while you may be temporarily free of minimum payments, your total amount owed will continue to grow, so you’ll want to start paying back those loans as soon as you’re able.
Learn more about deferment here.
Apply for Forbearance
If you don’t qualify for deferment, you may ask your lender for forbearance, which can reduce or defer your monthly payments for up to a year. Your interest will continue to accrue on all types of loans during this period so again, it’s best to begin repayment as soon as possible.
Learn more about forbearance here.
Explore Your Federal Repayment Plan Options
Most student loan repayment plans operate on a standard 10-year timeline, but there are alternatives that may be better suited to your circumstances.
For example, a graduated repayment plan uses the ten-year standard timeline to pay off student loans, but starts out with a lower monthly payment obligation that increases every two years. This alternative can serve those who anticipate significant income increases in their early working years.
Another alternative is the extended repayment plan in which the window for payback can be stretched to 25 years, lowering the monthly bill.
The Income-Based Repayment plan caps monthly student loan payments at 15 percent of discretionary income. If you keep up with your payments, your remaining debt may be forgiven after 25 years.
The Income-Sensitive Repayment Plan, Income-Driven Repayment Plan and Pay As You Earn Repayment Plan are three other Federal programs that can help you pay off student loans by keeping payments within the parameters of your means, provided you meet the eligibility requirements.
Note that these programs are only available for federal loans and are subject to eligibility. Click through the links above to see which programs are best suited to your needs and eligibility.
If You’re Already Delinquent or in Default on Your Student Loan Bill…
Your loan becomes delinquent as soon as you miss a payment and the delinquency continues until you get back get up to-date on your bills.
If you’re delinquent for 90 days or more, your lenders are likely to report your delinquency to the credit bureaus, hurting your credit score and your future ability to rent a home, get a loan, qualify for affordable insurance, etc.
If you’re already delinquent, meaning you’ve missed a payment and are unsure of how you can afford to catch up, take the action steps laid out above as soon as possible to avoid default.
If you’ve already defaulted, your loans may have already been turned over to a collection agency. There’s still no time like the present to be proactive though.
Remember, your student loans cannot be discharged in bankruptcy (with few exceptions), so no matter how far you feel you’ve fallen, the situation can and will continue to worsen until you take action.
Face your lenders and debt collectors head on to negotiate a repayment plan, or settle your debt for a lower sum.
If you have federal loans in default, you can apply for rehabilitation, which requires voluntary, on-time payments based on income and expenses for nine out of 10 consecutive months. Once you’ve has successfully done that, the loans come out of default, wage garnishment is stopped and you regain eligibility for benefits that were available on the loan before you defaulted, Additionally, your default will be removed from your credit history.
Note: You can only get your loans out of default through rehabilitation once. If you default again, you are not eligible to rehabilitate again.
The other option is loan consolidation, which allows you to pay off one or more federal student loans with a single new loan that has a fixed interest rate. After your defaulted loan has been consolidated, it will be eligible for benefits such as deferment, forbearance and loan forgiveness. Unlike rehabilitation, consolidation of a defaulted loan does not remove the record of the default from your credit history.
Learn more about federal loan consolidation and rehabilitation here.
Practice Good Financial Health
While student loan bills are admittedly burdensome, not being able to pay down your student loan debt may be indicative of larger financial problems.
Once you’ve become proactive with your student loan repayment, extend that enthusiasm across all aspects of your financial life – reducing expenses to bring down your cost of living, establishing emergency savings and finding ways to increase earnings such that you can afford to not only meet your minimum, but pay down the remainder of your debt as quickly as possible.