College or university costs a ton these days. Many students find themselves taking on a great deal of student loan debt. It’s not unheard of for some students to graduate with as much as half a million dollars in student loans. Let that sink in for a second. That’s $500,000 to eventually have to pay back. We haven’t even started calculating the interest charges that will be tacked on. With wages still stagnated in many places, it’s an almost impossible task.
A Staggering Amount of Student Debt
The problem is really widespread. There is an estimated total of $1.6 trillion dollar in student loan debt owed in the United States. That debt is owed by roughly 45 million Americans.
On the bright side, help could be on the way. With the Democrats controlling both chambers of Congress and the White House, there’s a real possibility they will pass some sort of legislature that vastly expands student loan forgiveness. Until that day comes (if it ever does), you are pretty much on your own. When your student debt levels are high, but you can’t find a job that pays enough to keep up with payments, what options do you have left? Defaulting would be devastating to your finances, but it can feel like the only option sometimes.
What Happens If You Default?
The first question that many student loanees ask themselves is simple.
“What happens if I default?”
There are some serious consequences if you default on federal student loans. Your tax refund can be garnished (or taken completely). So you won’t get that money as you might expect. Additionally, the government can garnish your wages and even take some of your federal benefits. Finally, the government can decide to sue you if you default. You might also be ineligible for certain programs and assistance.
If you have private student loans, they can take you to collections. Your credit score will suffer a huge hit and you could still see your wages garnished if collection agencies successfully sue you.
Avoid Defaulting on Your Student Loans
You won’t default as long as you can make your student loan payments. For some, that might mean getting the payments adjusted or lowered. Indeed, there are ways to avoid defaulting on your student loans. The first step is to simply make contact with your loan provider and ask for help. Make sure are upfront with them and prove that you are experiencing a financial hardship that qualifies you for some sort of deferment or forbearance. Usually, they will attempt to help you. After all, restructuring your loan (but still receiving payments for it) is better for them.
These options can vary. Some might pause payments for a while (although you’ll still be charged interest and have to pay them eventually). You also might be able to reduce your regular payments by a bit. Even if you agree to only pay the interest for a while (and none of the principal), it might help you get your finances back in order. These options are still way better than simply not paying.
Any sort of payment deferment or forbearance can be a great help if you are struggling. Call your lender and ask about your options. You might also qualify for the government’s income-based repayment program. In this case, your student loan payments are adjusted to reflect what you can afford to pay based on your income. It can be a great way to set up manageable payments.
Forgiving Student Loans
In some cases, you might be eligible for partial student loan forgiveness. Or you might be eligible for a program that will pay some of your student loans. AmeriCorps, for example, can help you reduce what you owe in student loans. The organization will help you pay some of your debt. The same is true of military service.
As for a more robust case of complete loan forgiveness, well, things aren’t looking great right now. The Biden administration certainly made it a key talking point during the presidential campaign. There was talk of immediately wiping out $50,000 of student loan debt for every eligible person. However, nothing has materialized so far. Sure, President Biden still has more than three years in charge (or seven, if he wins a second term), so there’s still a chance that they get something done eventually.
It’s also worth noting that the government offers other options for student loan forgiveness. If you work in certain field, you might qualify for loan forgiveness. For example, there’s the Public Service Loan Forgiveness (PSLF) program. You may be able to get your loan partially forgiven if you worked for the government or a qualified not-for-profit organization.
There are numerous requirements you have to meet, such as you needing to make any least 120 qualifying monthly payments under a qualifying repayment plan. Some teachers can also qualify for loan forgiveness if they teach for five consecutive years in a low-income school or educational service agency. It only forgives up to $17,500 in debt though.
On top of that, if you are willing to work in certain areas of the country (especially rural areas), you are often eligible for a certain amount of student loan forgiveness. This typically kicks in only after you work for a certain number of years. The Nurse Corps Loan Repayment Program, for example, will help pay for 60% of your outstanding nursing student loan debt over two years.
There’s an option to add a third year for another 25% of debt paid. That means you can have up to 85% of your student debt forgiven. You just have to be accepted by the program and commit to three years of service in an area that the agency deems to have a critical shortage of nurses.
The Type of Loan Matters
The teacher loan forgiveness program, for example, will only forgive Direct Loans or FFEL Program Loans. The PSLF program only works for Direct Loans. There are many other programs and quite a few other types of loans. The bottom line is that it pays to research what forgiveness programs are available to you for the type of loan that you carry.
It’s also important not to jump at the first chance to consolidate and fold your loans into a new one just because the interest rates are lower. Do your homework first (and some math). Ensure that you won’t be able to get any part of your original loans forgiven, before you move it into a new loan — that likely won’t ever qualify for a forgiveness programs.
Consequences of Not Paying Your Student Loan
We already talked about how your credit score will take a serious hit if you simply stop paying. Plus your wages and tax returns could be garnished. On top of those, there are even more consequences you might face:
- The entire balance of your loan could come due immediately, including interest.
- You might no longer be eligible for deferment or forbearance.
- The loan holder can take you to court.
These are not situations you want to be in. We understand that if you feel forced to choose between paying your rent and buying groceries or sending off another student loan payment, the choice seems obvious. However, before you start skipping payments, try some of these tactics instead.
What To Do If You Can’t Pay
There are several different ways to attack the problem of not being able to pay your student loans. Unfortunately, none of them make the loan go away completely. Hopefully, though, employing some of these solutions will give you some breathing room as you work towards a more stable financial future.
Cut Costs or Make More
We know, we know. This one should be obvious, right? It’s actually not. Many people don’t realize that there are plenty of ways for them to either cut costs or make more money. Ideally, you can do a bit of both and squeeze out enough room in your budget to keep making student loan payments. Maybe it’s as simple of reviewing and cutting back on your subscription services. Or maybe it’s a major switch, like adding a roommate to split expenses with.
There’s also a severe labor shortage in many U.S. cities right now. That means you can (and should) be considering a job switch if your current employer isn’t paying you enough to meet your obligations. Multiple studies have shown that you can maximize your income by switching jobs every few years, instead of staying loyal to a company that never seems to give you a decent raise.
Use an Income-Driven Repayment Plan
Most people with federal student loan are automatically enrolled in the Standard Repayment Plan (unless they opted out ahead of time). This program is designed to pay off your loan in ten years. It’s the fastest and cheapest option (in terms of interest), but also comes with the highest monthly payment.
You can ask to switch to a Pay As You Earn, Repay As You Earn, or an Income-Based Repayment Plan. You’ll need to fill out an application, but these programs can go a long way to alleviate those crushing monthly payments. They generally reduce your payments to 10-to-15 percent of your “discretionary income.” While these programs will extend the lifetime of your loans by up to 25 years, they are a better option than not paying at all.
Consolidating your debt is a great idea if you managed to acquire multiple loans to fund your education. It will bundle those debts together into a single, more affordable monthly payment. Ideally, you’ll end up with a lower interest rate too, since they remain at near-historic lows for now.
A Direct Consolidation Loan (DCL) is a specific banking product designed for this purpose. It’s a fixed rate loan that can give you up to 30 years to pay your student debt back. That means lower monthly payments (but a higher overall cost, due to extra years of interest).
One word of warning, though: A DCL only applied to federal loans. If you have private student loans, you’ll need to explore private consolidation solutions.
Seek Student Loan Deferment
A student loan deferment will excuse you from making payments for a short period of time — hopefully, enough time for you to improve your financial situation. Deferments are offered under certain circumstances, such as:
- You are enrolled in school at least half-time.
- You are enrolled in a graduate fellowship program
- You’re in an approved rehabilitiation program for disabled people.
- You are suddenly unemployed but seeking employment
- You’re suffering economic hardship (proof needed).
- You are on active military duty.
Most deferments will also pause interest from accruing. However, you won’t be eligible for deferment if your loans are already in default. So be proactive when it comes to your student loan problems. Waiting too long will only cost your more money, and reduce your available options.
Ask For Forbearance
Forbearance is similar to deferment, with the notable difference that interest will continue to accrue. When asking for a forbearance, you are seeking permission to stop making payments (or to make reduced payments) for a set period of time — usually six months to one year. Forbearances are typically easier to get approved for than deferment.
Forbearance comes in two different categories: General and Mandatory. General forbearances are usually (but not always) granted for the following reasons:
- Health or personal problems that cause medial expenses.
- Change in employment.
- Inability to pay your debt within the maximum repayment term (10 years, usually).
- Your monthly loan payments are more than 20% of your monthly income
- Other reasons deemed acceptable by your loan servicer.
Lenders are required to grant mandatory forbearance for the following conditions:
- You are serving in a medical or dental internship or residency program (meeting certain requirements).
- You own more per month on all student loans than 20% of your gross monthly income for up to three years.
- You’re serving in AmeriCrops position and received a national service award.
- You are a performing teacher that qualifies for teacher loan forgiveness.
- You qualify for partial repayment of loans under Dept. of Defense Student Loan Repayment Program.
- You’re a member of the National Guard and have been activated by the governor (but not eligible for military deferment)
The Bottom Line
Do your homework before you just let your student loans lapse. Consider what payments you can afford, then contact your creditors about your options. If you really are experiencing financial difficulty, there is probably some sort of help available to you. However, the sooner you contact your lenders to arrange matters, the better. You don’t want to end up facing even more dire consequences by ignoring the problem.