What to Do If You Can’t Afford…
By: Emily Guy Birken
The average amount that college graduates owe in student loans continues to rise—topping $25,000 according to the most recent data—while job prospects for new graduates are bleak to say the least. Students generally have a six-month grace period after graduation to allow them to find a job before the first payment is due. But since jobs are scarce and the minimum payment can be frighteningly high, that grace period can feel like far too little time.
Whether you are a recent graduate who is unsure how you will pay back your student loans, or someone several years out from attaining your degree who is having a financial setback, there are ways of mitigating the payment problem without defaulting. Here are the options available to you if you can’t repay your student loans:
1. Change your repayment plan.
Generally, you can expect a standard repayment plan of equal monthly payments for ten years. Should that monthly payment prove too high, you have a few ways to continue making payments at a lower rate.
The Graduated Repayment Plan offers you a set amount of time (often up to two years) to pay low, interest-only payments before they increase to the standard principal and interest payments. This plan can be a good place to start for recent graduates who are able to secure some kind of job, but are not yet making the full amount they expect their degree to garner in the future.
The Extended Repayment Plan also lowers your payments, but increases the term during which you will pay. You can extend your term to anywhere from 12 to 30 years. While this will make your monthly cash flow easier, you will end up spending a great deal more in interest over the life of the loan.
The Income-Contingent, Income-Sensitive, and Income-Based Repayment plans take your gross income, family size, and student debt burden into account in determining your monthly payment.
With the Income-Contingent plan, which is only available to Direct Loan borrowers, your payments are adjusted with changes in your income, and your loan term can last up to 25 years. Any outstanding balance on the loan after 25 years is discharged, although you are still responsible for taxes on the written-off amount.
The Income-Sensitive Plan is for FFELP borrowers and determines a monthly payment based upon a percentage of your income. The loan term is for 10 years.
The Income-Based Repayment Plan is available to both Direct Loan and FFELP borrowers and caps monthly payment at a lower percentage of income than the Income-Sensitive Plan
Recognize that any changes to your repayment schedule will end up costing you more in interest. Be sure to change back to the standard schedule as soon as you can afford it—it will save you a great deal.
If you have loans from multiple lenders, consolidating them all under one umbrella loan can help to reduce your interest rate and potentially lower your monthly payment. It will also give you only one lender to negotiate with, making any potential problems much easier to navigate.
3. Forbearance and Deferment
Depending on your circumstances, you may just want some kind of break from payments. If you are simply facing a financial downturn, you can request a forbearance of your loan for a specified amount of time—usually a year. During this time, interest will still accrue on your account but you do not owe a monthly payment.
My husband and I each put our student loans on forbearance for about nine months when we moved across the country, as we were carrying two mortgages and I had left my job for the move. We started paying the loans again as soon as our finances were back in order to avoid any more interest accruing.
If you are returning to school, entering military service, or facing disability or unemployment, you can request that your loans go into deferment. For the duration of your deferment, if you qualify for federal interest subsidies, the government will make the interest payments on your behalf, meaning your outstanding balance will not go up.
4. Loan Forgiveness and Cancellation
Those individuals who go into teaching or public service may be able to have all or part of their loans forgiven or cancelled. This is not an easy route to no payments, however, as these programs require as much as 10 years of on time monthly payments and specific criteria for the teaching or service to qualify. If you are a teacher or public servant, find out if you could qualify here. Additionally, the military forgives student loans under certain circumstances.
The Bottom Line
Student loans are like relationships: communication is important! No matter what difficult financial situation you find yourself in, talk to your lender about your options. As long as you are making a good faith effort to pay back your loans, your lender will make an effort to work with you.