Bills are piling up, and you're waiting for your next paycheck to arrive. You need to pay your rent, buy food and keep the electricity on. At this point, your student loan payments are probably the last thing on your mind.
While it may be tempting to avoid student loan repayment altogether, it's important that you manage your student loans -- even if you can't pay them right now -- in order to avoid defaulting on them.
The consequences of federal default can be severe. According to Heather Jarvis, a student loan expert, "Federal loans enter a default status after nine months of missed payments, and the government can pursue borrowers to the grave. They could garnish wages, seize federal benefits and intercept tax refunds." You may also end up owing collection charges and fees if you default on your federal student loans.
If you can't afford to pay your student loans at the moment, here are several options to consider.
1. Contact your loan servicer.
Instead of letting your federal or private loans fall to the wayside, consider contacting your loan servicer immediately if you can't make your student loan payments. Your loan servicer can discuss options with you and help you stay in good standing with your loans, so you can take steps to avoid student loan default.
2. Change your repayment plan.
If you're struggling to keep up with your federal student loans, the first thing you may want to do is change your repayment plan. Most federal student loans are eligible for income-driven plans, which cap your monthly payments at 10 to 20 percent of your discretionary income. According to the Federal Student Aid website, your discretionary income is defined as the difference between your income and up to 150 percent of the poverty guideline for your state and family size. This means that for some, the required monthly payments could be zero dollars until the borrower's discretionary income increases.
In order to qualify for income-based repayment and the Pay As You Earn / REPAYE program, you must prove partial financial hardship. According to the Federal Student Aid website, "Generally, you will meet this requirement if your federal student loan debt is higher than your annual discretionary income or represents a significant portion of your annual income." The date you took out the loan also factors into your eligibility.
If you don't qualify, you can opt for the income-contingent repayment plan instead, which bases your monthly payments on your loan type and family size. It's important to calculate your potential payments using the official repayment estimator before switching to this plan, as in some cases your payments could be larger than what they would be under a 10-year standard repayment plan.
Choosing an income-driven plan can help lower your payments and make them more manageable. You'll likely pay more interest over time under these plans - however, they could be a lifesaver if you're having trouble making payments.
3. Look into consolidation.
If you're struggling to keep up with multiple monthly payments, you may want to look into consolidation. Federal student loan holders can apply for a Direct Consolidation Loan, which consolidates your loans into one loan from a single lender and one monthly payment.
There's no application fee, and most federal student loans are eligible for consolidation. Private student loan holders aren't eligible for a Direct Consolidation Loan (however, if they have a mixture of private and federal loans, the federal loans will still be eligible for consolidation.)
As consolidation can offer you up to 30 years to pay off your loans, your new monthly payment could be lower than your current payments. The downside? You'll likely pay more in interest over the life of the loan and you may lose certain benefits, such as interest rate discounts and cancellation benefits. Because of this, it's important to weigh the costs and benefits before you consolidate.
4. Consider deferment or forbearance.
If you're unable to repay your student loans because you're experiencing economic hardship or are having difficulty finding work, you may be able to defer your federal loans for up to three years.
Deferment is the process of temporarily postponing your student loan payments. Depending on the type of loans you have -- such as Federal Perkins loans, Direct Subsidized loans, and Subsidized Federal Stafford loans -- the federal government may even pay the interest on your loans during deferment. You must submit a request to your loan servicer if you're interested in deferring your student loans.
If you don't qualify for deferment, you may be eligible for forbearance, which can postpone or reduce your payments for up to 12 months. For instances of illness and financial hardship, your lender decides whether to approve your forbearance. In other cases, you may be eligible for forbearance if you meet certain eligibility requirements.
Borrowers must request deferment and forbearance -- and they must continue to make payments until they're approved.
5. Look into loan forgiveness.
Another option you may want to look into is loan forgiveness.
Through the Public Service Loan Forgiveness program, federal student loan borrowers who work in public service at a qualifying nonprofit or government agency may have their loans forgiven after 10 years of qualifying monthly payments.
Borrowers on an income-driven plan can qualify for loan forgiveness if they make qualifying monthly payments for 20 to 25 years.
If you can't pay your student loans right now, the best thing to do is contact your loan servicer to discuss your options. Not taking action could negatively impact your financial life and could lead to default. Student loan repayment can be stressful, but if you're having a tough time, there are options for help.
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