Student loan debt is manageable for many, but for others, it’s a burden that feels insurmountable. If you can afford it, the best strategy is to pay your loans off as soon as possible – even faster than the traditional 10 year plan by applying extra cash to your highest interest loan. But if you can’t afford your loan payments, the worst thing you can do is to take a “head in the sand” approach and hope your problems will go away. Trust us, they won’t. Default is the worst case scenario for student loans because this can lead to garnishment of wages and tax refunds.
Here are some tips to keep your loans out of default or get them back on the right track if you are cash-strapped and struggling:
A Dollar’s Worth of Prevention Is Worth $1,000 of Cure
If you can prevent your loans from going into default, that’s your best-case scenario. To make sure this doesn’t happen, you need to understand the timeline to default. If you miss even one payment, you are deemed to be “delinquent,” but this is very curable. If you miss nine months of payments, you are deemed to be in “default.” After 12 months of payments missed, you may have your wages or tax refund garnished without any ruling from a court. There’s a definite lack of due process when it comes to student loan collections, so try not to let it get this far.
Act at the First Sign of Trouble
If you cannot find a job, have lost your job, had a pay cut or suffered any serious downfall in your financial circumstances, you should not take a wait-and-see approach. Taking a proactive stance the moment your finances take a hit is the smarter strategy. If your income is low and your student loans are a stretch, this means a small blip in your finances may cause disaster. If this is your situation or you’re already in too deep, immediately apply for Income Based Repayment. This will get you more affordable payments and may keep you from default.
Deferment or Forbearance Are Preferable to Default
Deferment and forbearance are not long-term solutions, but they can be very helpful strategies to get you out of hot water in the short run. When you know your finances are dire, you can immediately apply for deferment or forbearance to have your loans suspended temporarily. This can be done simultaneous to applying for IBR so that you can get a breather to find another job or get your finances reorganized, so you afford to resume payments.
Consolidation As a One Time Shot to Get You Out of Default
If you are already in default, speak to your loan servicer about rehabilitating your loans. By making several months of payments that are based on your ability to pay, you can rehab your loans and then apply for IBR. If you are already in default, you cannot apply for IBR until you rehabilitate. And as a one-shot-only last chance, you can consolidate your loans. This gives you an entirely fresh start because it pays off your old loans and gives you one larger new one. Once consolidated, you can apply for IBR to get more affordable payments.
Depending on how far behind your loans are, there will be different options available to you. What won’t work is to ignore your situation. Federal student loans have no statute of limitations and will follow you forever, lowering your credit score, hampering your ability to get a job that requires a credit check, and possibly resulting in garnishment of wages, tax refunds and even your bank balances.
To find out how to apply for IBR, deferment or forbearance, check out our How To guides in the Student Loan Help Center. And be sure to sign up for our free student loan management tool to keep track of your loans and watch yourself get closer each month to financial freedom from your debt!