You took out student loans to help you pay for college under the impression that you would be able to find a good-paying job after graduation. However, the job market is saturated and like many students, you may find yourself taking a job that pays significantly less than you were expecting. Suddenly, you find yourself having difficulty paying back your student loans along with all of your other monthly expenses. Defaulting on your loans would cause severe damage to your credit score. Fortunately, there are options available to help you make payments, and avoid defaulting.
Contact Your Servicer
The worst thing you can do when you cannot pay your student loans is to stop making payments. Late fees get tacked on, interest adds up, you start getting phone calls, and your credit score can be ruined. Instead, contact your student loan providers and let them know that you are having trouble. Federal student loan providers offer multiple repayment options such as income-based repayment or pay as you earn plans. Income-based repayment plans are based on your federal tax returns and can lower your monthly payments by as much as 20%. You have to apply for these plans and then reapply every year after. In some instances, your payments may even be zero dollars every month, but interest may still be accrued. If you have private student loan servicers, keep in mind that these providers are not obligated to offer any form of assistance. It is still worth the call since some of them may be willing to work something out with you.
Loan consolidation is an option if you have several federal student loans. It takes all of your federal loans and rolls them into one single monthly payment. In the process, your monthly payment can be lowered. Your repayment period may be extended, but it is important to know that even if your interest rate is lower, you may wind up paying more in interest overall. You may also lose some borrower benefits that you once had when you originally took out the loan such as interest rate discounts or loan cancellation. So before you consolidate, be sure to weigh the pros and cons carefully.
Postpone Your Payments
Deferment and forbearance are options available to temporarily reduce or postpone your monthly payments, usually no longer than a 12-month period. However, they are available only if you meet certain requirements. For instance, deferment is available if you can prove economic hardship or unemployment. With this option, your interest is deferred. This means it will not accrue interest during the deferment period.
Forbearance, on the other hand, is often available if you do not qualify for a deferment. Again, you must be able to prove economic hardship. Examples of this includes things such as illnesses, moving (temporary unemployment) or having a child. Your payments can be postponed for up to a year. However, interest will accrue during the forbearance period. Both deferment and forbearance are available for federal student loans, but may not be for private student loans. If you have private loans, be sure to call your provider to ask.
Research Cancellation and Forgiveness Options
Depending on what type of employment you have you may be eligible to have your student loans forgiven. If you work in the public sector (teacher, nurse, military, etc.), you may qualify for federal or state-sponsored programs. There are also a few national organizations as well. To qualify, you must first make at least 120 qualifying payments.
In extreme cases, such as permanent disability, you may be able to have your loans canceled through bankruptcy. However, you need to have proper documentation. Even with the proper documentation, it is very rare that you can have your loans canceled through bankruptcy.
Fixing Your Default Status
If you have already defaulted on your student loans, there are things you can do to fix your status and your credit score. Call your student loan servicer and get on a repayment plan. After several months of on-time payments (in some cases, as few as 9 or 10) the default status can be taken off of your credit history. Private loan servicers do not have to offer this option, but many are willing to remove a default status if you are willing to work with them and make payments.
Not being able to repay your student loans can be a scary option, but don’t just stop making payments. In doing so, you can seriously hurt your credit score making it difficult to get loans in the future. Take a deep breath and know that there are options to help you.