What if I Can't Pay My Student Loans?

In Paying for College on Apr 13, 2016

Sometimes, despite the best of intentions, you’ll run into trouble repaying your student loans. The first thing you should do is talk to the lender to explore your options. Ignoring the problem will only make it worse.

First, figure out if your problem is short-term or long-term. If you lost your job but expect to get another job soon, that’s a short-term problem. Similarly, if you are going on medical or maternity/paternity leave, that's a short-term problem. If you have a job, but it doesn’t pay well enough to let you repay your student loans, that’s a long-term problem.

For short-term problems, ask about deferments and forbearances. These are short-term suspensions of the obligation to repay your student loans. Interest will continue to accrue on your student loans. (With a deferment, the federal government pays the interest on subsidized loans but not on unsubsidized loans. With a forbearance, the borrower is responsible for paying the interest on both subsidized and unsubsidized loans.) If the interest isn’t paid as it accrues, it will be capitalized (added to the loan balance), digging you into a deeper hole. Your debt won’t increase very much for just a few months of deferments and forbearances. They are a good alternative to defaulting on your debt.

For long-term problems, ask about alternate repayment plans, like extended repayment and income-driven repayment. These repayment plans reduce the monthly payment to more affordable levels by increasing the term of the loan. Also look into options for loan cancellation and forgiveness, such as public service loan forgiveness and disability discharges. It is also helpful to review all aspects of your finances, to see if there are opportunities to increase income (e.g., ask for a raise or get a part-time job in the evenings and weekends) or cut expenses.

Whatever you do, try to avoid defaulting on your student loans. Private student loans go into default after 120 days of non-payment and federal student loans go into default after 360 days of non-payment. Not only will collection charges be deducted from your loan payments, slowing your progress in repaying the debt, but the federal government has very strong powers to compel repayment of defaulted student loans. They can garnish up to 15 percent of your wages and Social Security retirement and disability benefits and offset federal and state income tax refunds (and lottery winnings), all without a court order. They can prevent renewal of professional licenses, issue negative reports to credit reporting agencies, block access to FHA and VA mortgages, and file a lawsuit against you. When the lender gets a court judgment after suing you, the lender can get a bank levy to seize your assets.

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