For many freshly-minted grads struggling to find their footing in a tough job market, the arrival of their first student loan bill is a harsh reality check. Just as student loan debt is approaching an all-time high, default rates are also skyrocketing. According to a recent report from the Consumer Financial Protection Bureau, approximately 7 million borrowers are in default on a federal or private student loan. If your student loan payments are putting the squeeze on your budget, you need to know what your options are.
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Negotiating a Lower Payment
If you’re barely scraping by after making your monthly loan payments, negotiating a lower payment could give you some much-needed breathing room. The federal government offers several repayment plans that are based on how much money you make. With the Income-Based Repayment Plan, you put 15 percent of your discretionary income towards your student loans each month. After 25 years, your remaining loan balance is forgiven. If you change jobs or your income goes up, you can go back to a standard repayment plan.
If need an even smaller payment, the Pay As You Earn Plan lets you pay just 10 percent of your discretionary income to your loans each month. You can stay on the plan for up to 20 years as long as you meet the federal income guidelines. After 20 years, anything you still owe is automatically wiped out. Just remember that with either repayment option, you’ll likely end up paying more in interest and you’ll also have to shell out taxes on the money that’s forgiven.
When You Can’t Pay at All
If you can’t afford to pay anything towards your student loans, you may be able to get a deferment or forbearance. Deferment means that the payments and the interest due on your loan are postponed for a set period of time. Generally, you can get a deferment if you’re enrolled in school at least half-time, participating in a graduate fellowship, unemployed, serving in the military or going through a financial hardship. Depending on the type of loans you have, the federal government may even cover the interest for you while you’re in deferment.
You can ask your lender to put your loan in forbearance if you don’t qualify for a deferment. During a forbearance period, you won’t have to make any payments on the principal but your interest will keep adding up. You have the option of making payments just towards the interest but if you don’t, the total amount will be added to your loan balance which means you could end up significantly more than you originally borrowed.
When Default Occurs
Technically, your loan is considered delinquent the first day after you miss a payment. If you’ve never been late before or you’re less than 30 days late, your lender may not take action against you right away. After 30 days, you’re likely to start getting phone calls from the lender. If you haven’t paid up at the 60-day mark, expect the phone calls to become more frequent. After 270 days, you’ll officially be in default, which opens the door for a range of collection actions. You won’t be able to get a forbearance or deferment at this point and the federal government can take steps to start garnishing your wages. Once you’re in default, the only way to get out is to pay your loans off in full, consolidate them into another loan or go through loan rehabilitation. This means that you work out a new repayment agreement with your lender. After you make a set number of payments, you won’t be in default anymore.
If You Miss a Payment
The last thing you may want to do when you miss a student loan payment is talk to your lender but it’s the first step towards getting your account back on track. Defaulting on a student loan can wreak havoc with your finances and cause long-term damage to your credit. Late payments and collection actions can make your score nosedive, which means it’ll be harder for you to get new loans in the future. Your existing creditors might decide to jack up your interest rates if they think you won’t be able to pay all your accounts on time. A wage garnishment could make it difficult to cover your basic living expenses if you’re already struggling. When you’re experiencing temporary student loan woes, being proactive in trying to find a solution can head off a long-term financial disaster.
Sources: Consumer Financial Protection Bureau: A closer look at the trillion, U.S. Department of Education: Understanding Default, U.S. Department of Education: Pay As You Earn Repayment Plan, U.S. Department of Education: Income-Based Repayment Plan, U.S. Department of Education: Deferment and Forbearance