What to do When You Can’t Afford Your Student Loan Payment
The consequences of not paying student loans are harsh. Unlike other types of loans, if you are unable to make payments, student loans are generally not dischargeable with bankruptcy.1 Defaulting on a student loan can result in anything from being sued for the amount of the loan, to the loss of social security benefits. Your tax refunds can be intercepted and you may end up surrendering your income to repay the debt, not to mention the consequences defaulting will have on your credit.1
However, not all hope is lost when you realize you are going to fall behind. Contrary to what most students believe, there are real options out there when you can’t afford to make your student loan payments that don’t involve default.
The first step in avoiding default is to call your student loan servicing company and discuss various payment plans.2 You might find that you qualify for an income-based repayment plan or a “pay as you earn” plan. Both of these plans use your income to calculate how much you’ll pay each month. Additionally, for federal student loans both of these plans offer student loan forgiveness at the end of the plan, which is typically between 20 to 25 years.
As we mentioned in our article on income-driven repayment plans, these plans come with a number of benefits — including loan forgiveness and lower monthly payments — but aren’t always right for everyone. Depending on your current financial situation and what your lender says, you can make a decision about whether an income-based repayment plan is right for you. It is important to make sure you don’t only consider what is beneficial in the immediate future, but take long-term goals into account as well.
Student Loan Consolidation or Refinancing
If you have multiple qualifying loans, you might be able to consolidate them into one student loan, with one associated payment and only one account accruing interest, depending on the terms. When consolidating loans, it is possible to avail yourself of better repayment terms that could make paying them off easier, and more affordable.
Alternatively, and sometimes in conjunction with consolidation plans, student loan refinancing consists of taking out a brand new loan to pay off and then replace your existing loans. Sometimes, your interest rate for the new refinanced loan might be lower than the interest rates of your original student loans. You can learn more about the differences between student loan consolidation and refinancing and the processes for each in this article.
If none of the previously mentioned options seem to make sense considering your financial status, you can ask for a deferment. Basically, a deferment is a period of time wherein your principal and interest payments are delayed.3 A deferment does not negate what you already owe, but it does buy you time to repay your student loans without the immediate threat of default of overwhelming interest. During deferment, you are generally not responsible for paying the interest that accrues on certain loan types such as Direct Subsidized Loans and Federal Perkins Loans.
For a complete list of which types of loans do not accrue interest under deferment, check this page on the Department of Education website. Deferments are not automatic, and you will submit a request for one to your loan service provider. There are several events that allow you to qualify for a deferment; these include being enrolled at least half-time in an eligible college or career, being enrolled in an approved graduate fellowship program, being unemployed, certain types of financial hardships and more. The Department of Education details every circumstance that would make you eligible for deferment, with respective forms to request the same.3
If you don’t qualify for a deferment, you can request a forbearance. Forbearance is a loan repayment option that helps borrowers who are having difficulty making payments. A forbearance allows for a payment to be greatly reduced or suspended until a future date. The main difference between deferment and forbearance is that with forbearance, you are responsible for paying the interest that accrues on all type so student loans within the forbearance period.3
Our article on forbearance details important questions regarding the process. Forbearance is usually requested when a borrower is facing financial difficulty, often as a result of lack of employment, a decrease in income or illness and/or disability that prevents someone from working. Contrary to missing payments, forbearance has the benefit of not negatively impacting the borrower’s credit score as it is a financial agreement made between the borrower and the creditor.
Credit Card Repayment
It is important to touch upon the option of credit card repayment for student loans.4 Many students wonder whether they can repay their loans via a credit card, and while it is possible to do so, it is not a sound decision. Refinancing your loan or applying for an income repayment plan is a much better decision.4
Credit cards have an interest rate of almost double than that of student loans, (even more so if they’ve been refinanced) and according to author Johnny Jet from Forbes, moving debt to a credit card is “is practically a suicide mission” if you plan on erasing that debt eventually. Unless you can pay your balance every month, your debt will grow exponentially, and your credit score will dwindle. In short, transferring your student loan to your credit card is much too big of a risk.
As you can see, even though using credit cards to replace your student loan isn’t wise, there are plenty of other possibilities you can take advantage of. Ultimately, even though most students don’t realize it, there are very real options out there in terms of paying off your student loans that don’t involve defaulting.