There’s no doubt about it – our country is in a student loan crisis. Student loan debt has surpassed a trillion dollars. On top of that, default rates are at their highest rates and are rising. Reasons for delinquency and default include unemployment, underemployment and other financial stresses. If you are a recent graduate and struggling to find work and worried about your ability to pay your student loans, the time to make alternate plans to avoid delinquency and default is now!
If you default on your student loans, your wages can be garnished, your tax refunds can be seized and your credit rating could be ruined. With bad credit, financing a car or home affordably can soon be out of reach. This is why it’s important to take every step you can to avoid delinquency and default. The effects of letting your student loans go bad can follow you for the rest of your life. Student loans are the only form of debt that bankruptcy can’t dismiss and have no statute of limitations for collection – this debt can literally follow you to the grave!
Here are five ways to eliminate or minimize your student loan payments while you get your financial footing:
1. Income-Based Repayment Program (IBR)
This is a relatively new plan (implemented in 2009) that is very underutilized. Designed for federal student loan borrowers experiencing a “partial financial hardship,” IBR allows you to make decreased payments if you can’t afford your standard payments. IBR caps your monthly student loan payment at 15% of your discretionary income. In 2014, it will drop to 10% of discretionary income. If your finances are tight, this may be a great option. What’s more, the plan can be extended, based on your income, up to 25 years and if you pay all your reduced payments for 25 years, the remainder of your student loan debt (both principal and interest) will be wiped out!
2. Graduated Repayment Plan
Under the graduated repayment plan, rather than coming straight out of school and facing whopping big student loan payments, you can ramp up how much you pay as your job prospects and salary increase. Monthly payments start much lower than standard loan payments and then gradually increase every two years for up to ten years. The downside to this plan is that you will end up paying more in interest, but if it allows you to avoid delinquency or default, the extra interest is worth it.
3. Extended Repayment Plan
The extended repayment plan – as the name indicates – gives you much longer to pay off your student loan. Under this plan, rather than paying out over a decade, you can take up to 25 years to eradicate your educational debt. This will give you much lower payments, but also means you will be paying much more in interest. If you have an expensive degree, but have opted for a lower paying career, this may be the plan for you. But if you can afford to pay your student debt down faster, you should. Consider this a plan of last resort to avoid delinquency or default.
More than half of student loans are now in deferment, but this is preferable to default. There are many deferment programs, but what they have in common is that they temporarily suspend your payments while you are in financial difficulty. You can receive a deferment if you are unemployed, serving in the military or in financial straits. Some loans can be deferred while you serve in law enforcement or volunteer programs including the Peace Corps. Depending on the type of loan you have, interest may or may not accrue during the deferment period, but you won’t have to make any payments as long as you continue to qualify.
Forbearance differs from deferment because interest will continue to accrue. Your payments will be suspended for a short period of time for reasons including medical crisis/illness, unemployment, income loss or disability. While in forbearance, you can make partial payments of any amount you choose – this can be helpful to minimize the impact of accruing interest. When you request forbearance, you specify whether you will make any partial payments during the forbearance period. You usually get a six month forbearance that can be renewed twice for a total of 18 months of relief.
If you are struggling to make your student loan payments or are worried that you could be delinquent in the future, consider these options to avoid delinquency or default. These programs won’t work concurrently – if you are in one program, you can’t do another – but they can be used subsequently. If you are in forbearance and run out of time with no financial relief, you can apply for deferment or a reduce payment plan. You can move between these options to protect your credit and your future while working to pay off your student loans!