Pretending Your Student Debt Doesn’t Exist Could Be More Stressful
Ignoring a problem in the hopes that it’ll go away can feel very appealing on the surface. But while engrossing one’s self in the latest TV drama might be a good distraction, it isn’t actually going to resolve anything. This is especially true when it comes to student loan debt. If you pretend it doesn’t actually exist, you’re not going to make it disappear, and you may even make it worse.
If student loan stress is causing you to lose sleep, you’re not alone. Stress from debt can have an impact on some people’s mental health. A 2017 report found that 80% of working professionals with student loans claimed that their debt was a ‘significant’ or ‘very significant’ stressor in their lives.
A great way to potentially counter stress from debt is to craft an action plan to get ahead of your debt. Help take charge of your student debt with these five tips.
1. Understanding the Consequences of Ignoring Your Debt
There is so much misinformation about student loans out there. It’s important that you understand exactly what happens when you aren’t able to pay and what your options are.
A key mistake some borrowers make is not understanding the consequences of ignoring their student debt. Borrowers may think that when they put their loans into forbearance or deferment they aren’t being charged interest during the forbearance or deferment periods—which may not be the case.
If your loan is in forbearance you are almost always responsible for paying accrued interest during the forbearance period. If your student loan is being deferred, your responsibility for accrued interest will depend on the type of loan you have .
Others may believe that they can potentially declare bankruptcy on their student loans if they can’t pay them—which is only possible in very rare and specific circumstances.
And not making student loan payments can have more consequences than just a late fee. If you fail to make a payment, your loan will be considered delinquent . If you are more than 90 days delinquent, your loan servicer will report the delinquency to all three major credit bureaus. This can impact your credit score and your finances.
If you don’t pay your student debt for nine months or 270 days, your loans will go into default . That means that the government could do things like garnish your wages, take you to court, keep you from renewing or obtaining professional licenses, and even withhold your tax return. The fact that you defaulted on your student loans would also appear on your credit report.
As you can see, there are serious consequences for ignoring your student debt. Try to organize your student loans and create a plan right after you graduate to help stay on top of your payments.
2. Enrolling in a Student Loan Repayment Program
You may be able to reduce your monthly payments through income-based repayment programs. If you’re eligible to enroll in these programs, you can reduce your monthly payments on your federal loans to (generally) just 10% of your discretionary income.
Programs like income-driven repayment plans help to avoid defaulting on your student loans and can make payments more manageable since you pay only what you can afford.
And after 20 to 25 years of qualifying payments on an income-driven plan, you could be eligible to have the remaining balance of your student loans forgiven. If you do enroll in an income-driven repayment plan know that while your monthly payments will decrease, you could end up paying more in interest over the life of the loan. (That’s because a longer term means more payments total.)
3. Paying Your Interest
If you’re still enrolled in school, are using your grace period, or if your loans are in forbearance or deferment, you typically aren’t required to make any payments on your federal student loans. However, depending on the type of loan you have, you may be accruing interest on your loans during these periods.
When these time periods end, any accrued interest is capitalized (this is when a lender adds any unpaid interest to the principal balance of the loans). Then, interest is charged on that new principal. This means paying interest on top of interest, which can seriously increase the total amount of money you need to pay back to the lender. You can avoid some of this student loan stress by making interest-only payments on your student loans, even if you are not required to make monthly payments.
4. Getting Ready for the End of Your Grace Period
You graduated and that means you have six carefree months before you have to start repaying your student loans, right? While you might not need to make payments on your student loans immediately after graduation, it’s important that you keep your student loans in mind.
As you make choices like where to live and what job to accept, make sure you keep your student loan payments in your emergency fund. Having an emergency fund available helps you be better prepared to pay for unexpected expenses and keep your student loan repayment plan on track.
5. Considering Refinancing
Consider tackling your debt stress head on by refinancing your student loans. When you refinance, your existing loans are paid off with a new loan from a private lender, with a new interest rate, monthly payment, and term.
Lenders use your credit history and earning potential, among other financial factors, to determine your new interest rate. If you’re eligible to refinance to a lower interest rate, you’d reduce the amount of money you spend in interest over the life of the loan.
When you refinance, you can also customize your repayment terms—increasing or decreasing in length. If you lengthen your loan term, you may pay less every month but will likely end up paying more in interest over the life of the loan. Likewise if you decrease the length of the loan term, your monthly payments will likely go up, but you’d pay less in interest overall.
If you are taking advantage of federal repayment plans like income-driven repayment, forbearance, or deferment, it’s important to understand you won’t be able to use these programs again if you refinance with a private lender.
Refinancing your student loan debt can help you customize your repayment terms to fit your lifestyle and budget. That can go a long way toward helping reduce any stress from debt and could even help you get out of student loan debt sooner.
Interested in refinancing your student loan debt? Find your rate by answering a few questions online today.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice about bankruptcy.