What To Do When You Can’t Make Your Student Loan Payments
Can’t make your student loan payments? It’s a tough situation to be in, but you do have options…
As we have discussed at length before, the student loan debt level is at an all-time high, and it’s no surprise that many college graduates are having trouble making their student loan payments. Many college students have taken on far more debt than they had anticipated, leaving them with higher payments than they can afford – especially if they want to do other adult things like purchase a home, get married, or start a family. Setting a budget and sticking to it, while putting off making major purchases, may help, but what if you get in trouble and can’t simply can’t make your payments?
Student loans are notoriously difficult to wriggle out of, but if you lose your job or face another unexpected financial disaster, it is important to understand your options if you are unable to pay back your student loans.
Here are a few options, depending on your situation:
If You Are Unable To Make Payments Temporarily…
Consider Forbearance. Forbearance is a temporary suspension in your obligation to make payments on your loan, and is usually for a specified period of time. Keep in mind that during forbearance, interest will continue to accrue on your outstanding loan balance, which means you will end up owing more on your loans (and probably having a higher loan payment) in the end – but it could be a good option if you cannot make a payment for a short period of time. Private student loans may have more limited forbearance options than federal student loans, and some may charge a fee to exercise this option, so be sure to get full details from your lender before opting for forbearance.
Another potential option is called Deferment. Deferment is similar to forbearance, except that your loan balance will not accrue interest during the suspension of payments. (This is the option that many federal student loans offer while the student is still in school.) If you can qualify for deferment, it can be a great option for your federal student loans. Most private student loans do not offer this option, but check with your lender to be sure.
If You Need to Lower Your Payments…
There are a number of options available if you find that you can afford a lesser student loan payment. One option is Interest-Only Payments. This option allows you to pay only the monthly interest that accrues on the loan. While you won’t be paying down your principle, at least your balance won’t be growing during this time period. This option is usually available for a specified period of time, and both private lenders and federal loans may allow you to do this.
You may also opt for a Rate Reduction Program, which may reduce your loan interest rate if you enroll in automatic monthly payments through your lender. While this won’t make a huge difference in your monthly loan payment, it can save you a lot of money in the long run.
One very popular option is a Graduated Repayment Plan. Graduated repayment plans may require smaller payments in the first few years of the loan, followed by regular increases over the life of the loan, and are designed to match the expected salary growth of a new college graduate moving up in the work force. These are typically only available for federal student loans – not private ones.
Probably the most popular way to lower your student loan payments is to Refinance. Refinancing your student loans will often allow you to lock in a lower interest rate for the life of the loan, or extend your loan repayment period for a longer term, thus permanently lowering your minimum payment requirement. This option is available for both private and federal student loans.
If You Can’t Make Payments At All…
This would be the worst-case scenario, but if you really can’t make your student loan payments at all, and don’t know when you will be able to, you may have to consider Bankruptcy. While most student loans are except from bankruptcy proceedings, if you have other debts, getting rid of these by declaring bankruptcy may free up funds for you to apply towards your student loan payments. Keep in mind that this should be a last resort, as bankruptcy can negatively impact your credit for years into the future, making it difficult for you to make other purchases.
In some very extreme cases, you may be able to appeal a court of law to Discharge your student loan debt. For a discharge to happen, as this article explains, “You would need to provide evidence showing that the debt is creating undue hardship following extreme extenuating circumstances that are not expected to change in the future.”
If you have not made student loan payments for some time, your debt will likely be transferred to a collections agency for Settlement. In most cases, the lender will try to have a judgement levied against you for payment of the debt. The terms of this may vary, but can include garnishment of your wages to meet your debt obligation, and/or negotiation of a smaller payment or the option to settle the debt for a percentage of what you owe.
Not being able to pay your student loans back is a scenario that you should avoid at all costs if at all possible. Of course, the best way to avoid this situation is to plan in advance for college costs and avoid taking on too much debt to handle! If you need help figuring out how to afford college, please contact us for a free family strategy session – if possible, well before the college years arrive.