What to Do if You're Struggling With Student Loan Payments

What to Do if You're Struggling With Student Loan Payments

If you're wondering how you're going to make your high loan payments, you are definitely not alone.

Defaults on student loans are at a record 13.4%, and even for those able to make payments, 44% of graduates are delaying buying a home, and 23% will delay having children because of their debt.

But there are options to help you. We're going to give you all the tools and information you need to tackle this problem. First, we want to explain why you should prioritize paying your loans, instead of ignoring them--as tempting as that may sound.

What Happens When You Default on Your Student Loans

Student loan default occurs if you fail to make your full student loan payments for nine months (partial payments don't count as a payment). If you default on credit card debt, you might be able to declare bankruptcy or negotiate to pay off a portion. But defaulting on your student loans will only make your financial situation much, much worse:

  • Your entire loan balance (principleThis is the initial amount you borrowed, which doesn’t include interest you’ve been charged. For example, if you take out a loan for $10,000, the principle is $10,000. You might owe more to the lender, however, because of interest charged over time. and interestWhat you “pay” for taking out the loan. Interest–ranging from 3% to 18% of the loan–is calculated daily and added to the balance of what you owe the lender. The longer you take to pay back the loan, the more interest you will pay overall.) will be due in full immediately. (We know, this makes no sense and seems mean-spirited, but that's what happens.)
  • You'll lose eligibility for loan deferment (which we'll explain below).
  • Your account may be turned over to a collection agency.
  • You'll have to pay additional charges, late fees and collection costs, all of which become part of your debt, pushing up the balance even further.
  • Your credit rating will be damaged.
  • Your federal and state income tax refunds could be withheld, and you may have a portion of your wages garnishedA process in which your employer pays your debts to your creditor directly out of your wages..
  • Your college records might be placed on hold.
  • You won't be eligible for additional federal student aid.
  • If a potential employer runs a credit check, you could lose out on that job opportunity.
  • Finally, if you had a cosigner on your loan like a parent, the debt collectors could go after them to get the money, ruining their credit as well.

In summary: Do not default on your student loans. Your first financial priority should be making payments in full every month.

Can't I Just Start Over With a Clean Slate?

There is very, very rarely an option to discharge your federal student loans, except in special situations:

  • You die
  • You become totally and permanently disabled and meet certain additional requirements
  • You are unable to complete your program of study due to the closing of your school
  • Your school falsely certified your loan eligibility
  • A loan in your name was falsely certified as a result of a crime of identity theft
  • Your school failed to refund required loan funds to your lender on your behalf

Note that these situations do not apply to private student loans. For example, if you die, your private student loans are passed on to your next of kin.

What About Bankruptcy?

If you declare bankruptcy, you can wipe your credit card, car loan and other personal debt. But your student loans will remain. In order to discharge your student loan debt, you have to go back to the court after being in repayment for five years, and prove that repaying the student loans would cause "undue hardship." Short of having a severe disability, you probably won't be able to prove this. Your best--OK, only--option, is to do your best to pay your loans.

So, now that we've sufficiently scared you, let's discuss what you can do to make those loan payments more palatable.

Know Your Loans

Before you can take any action to alleviate your burden, you need to know exactly what type of loans you have, because that will govern what payment plans you can choose, or if you can choose a payment plan at all. Look up your loans at nslds.ed.gov. If they are there, they are federal loans, and NSLDS will tell you which type. If any of your loans aren't there, that means they are private.

The bad news is that if you have private loans, many of the options we are about to discuss are not officially available to you--private lenders are not obligated to work with you to accommodate your financial situation. You could try contacting your lender, but the best way to deal with private loans is to put all your financial resources toward them while paying the minimum on your other debt payments. You could even choose a payment plan for your federal loans (discussed below), if you have them, and that will lower your monthly payment so you can send more money to private loans.

Shore Up Your Budget

The first thing you should do if you're struggling to pay your loans is look at your own finances and decide what you really can afford, and if you can find more room to pay. Think about how you can spend less and put that money toward your student loan payments. Options range from dialing back many everyday expenses (our Cut Your Costs Bootcamp is a good place to start), canceling your cable, turning down a few invitations for drinks or vacations, all the way to making the choice to move to a less expensive apartment or move in with your parents for a little bit (like this recent graduate did). It's not fun, but you know what is? Sending in your last student loan payment.

You should also try earning more. You can find suggestions for side gigs to earn income here and in our checklist on paying off student loansOne financial plus of taking on jobs after work and on the weekends? It makes it easier to say no to expensive social outings. So you'll be earning money instead of spending it.

Change Your Payment Plan

If you have federal loans, there are actual several different payment options available. If you never spoke with your lender, you were automatically enrolled in the standard payment plan. It costs the least in interest, but has higher initial payments. And since you're here, we're guessing that isn't working for you.

The main thing to understand about payment plans is that the lower the monthly payment, the longer you'll have loans and the more interest you'll pay over the life of the loan. So think hard before you drop your monthly payments, because it could cost you thousands or tens of thousands more overall, though it makes things less painful now.

Again, these payment plans only apply to federal loans. To change your payment plan with a private lender, you'll have to contact them and inquire about options.

If You're Sure Your Salary Will Go Up ...

Choose a Graduated Plan: Based on the idea that your income will gradually increase, payments start out low and increase over a ten-year period.

If You Have More Than $30,000 in Federal Loans ...

Choose an Extended Plan: If your student loans are high, you can extend your payments over 12-30 years, meaning your monthly payments will be lower. Payments can be fixed or graduated.

If You Are Suffering From Financial Hardship ...

Choose an Income-Based, Income-Contingent or Income-Sensitive Plan: Choosing one of these options (they're similar, but apply to different types of federal loans) will lower your payments to be based on your current income. You'll pay more interest over the life of the loan, but if you still have outstanding loans after 25 years, they might be canceled.

Consider Deferment or Forbearance

Deferment is when you can stop making payments for a period of time. You're eligible for deferment if your loans are federal and you are:

  • Unable to find full-time employment (for up to three years)
  • Undergoing economic hardship (you can claim this if you are serving in the Peace Corps)
  • Enrolled at least half-time in an eligible postsecondary school
  • Studying in an approved graduate fellowship program or approved rehabilitation training program for the disabled
  • Serving active duty in the military or National Guard straight from school.

Note: You can only defer payment of PLUS loans if they were disbursed after July 1st, 2008.

If your loans are subsidized: There's almost no downside to deferring your loans, if you qualify, because the government will pay the interest being charged while your loans are deferred.

If your loans are unsubsidized: Interest will accrue and be added to the principle, which will lead to more pain when your loans come out of deferment. So try to make at least interest payments during deferment.

If you don't qualify for deferment, you might still qualify for forbearance, which allows you to stop or reduce your monthly payments due to economic hardship or illness. No matter what type of loan you have, you are responsible for paying interest that accrues during this time, or it will be added to the loan principle--and we don't mean in the normal way that you pay interest on top of your loan principle. It will actually increase the principle of your loan. Again, try to make at least interest payments while your loans are in forbearance.

Just don't stop making payments on your loans until you receive official notice that deferment or forbearance is in effect!

Write Your Representative

If you have private student loans and are struggling, well, we really feel for you. It wasn't until 2005 that Congress reformed bankruptcy law to make student loans non-dischargeable in bankruptcy. But more and more people are speaking out for reform to change this. If you've tried everything to work with your private lender and improve your income, and nothing works, your next step is to write your representative and tell your story and/or start a petition calling for reform.


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