College is expensive—69% of 2018 graduates took on debt, and the averaauge debt load for a recent grad is around $30,000. To make matters worse, recent grads expect to make close to $60,000 as their starting salary, but on average earn closer to $47,000 out of the gate.
That disconnect between reality and expectations can be challenging, leading to overspending and tightened budgets. So if you’re struggling to pay off your student debt, you’re not alone.
The worst thing you can do when you’re having trouble paying student loans is to just stop making payments. If more than 270 days pass on your federal student loan payment, or three months pass on your private student loan payment, you’ll be one of the million borrowers who default on their student loans each year.
And unlike other debt, you usually can’t dispose of student loan balances in bankruptcy. Defaulting on your federal student loans can lead to:
• Immediately owing the balance of your entire loan
• Losing eligibility for forbearance, deferment, or federal repayment plans
• Losing eligibility for federal student aid
• Damaging your credit score, inhibiting your ability to qualify to purchase a car or a house or qualify for credit cards in the future
• Withholding of federal benefits and tax refunds
• Garnishing of wages
• Your loan holder taking you to court
• Inability to sell or purchase assets such as real estate
• Withholding of your academic transcript from your school until loans are repaid
Defaulting on your private student loan can lead to similar consequences, and more, including:
• Seeking repayment from the cosigners of your loan
• Calls, letters, and notifications from debt collectors
• Additional collection charges on the balance of your loan
• Legal action from the lender, suing you or your cosigner
To avoid these negative consequences, one option for borrowers struggling to pay is student loan deferment.
Student loan deferment allows eligible borrowers to temporarily reduce loan payments or stop them altogether. It’s a pretty popular choice: As of the second quarter of 2019, 3.7 million borrowers owing a combined $128 billion had their loans in deferment.
If you aren’t able to afford your monthly student loan payments, it might be worth looking into student loan deferment. But while it could be a good option for temporary relief, you may still need to seek out other solutions for reducing your payments in the long term.
Who Is Eligible for Student Loan Deferment?
To be granted a deferment on federal loans, you need to meet certain criteria.
You may be eligible if you’re:
• Enrolled at least part-time in college, graduate school, or a professional school
• Unable to find a full-time job or are experiencing economic hardship
• On active military duty serving in relation to war, military operation, or response to a national emergency
• In the 13-month period following active duty
• Enrolled in the Peace Corps
• Taking part in a graduate fellowship program
• Experiencing a medical hardship
• Enrolled in an approved rehabilitation program for the disabled
If you re-enroll in college or career school part-time, your federal student loans may automatically go into in-school deferment with a notification from your student loan provider.
Your loans may also keep accruing interest during your deferment—depending on what kind of federal student loans you have. You are still responsible for paying interest if you have:
• A Direct Unsubsidized (Stafford) Loan
• A Direct PLUS Loan
If you don’t pay the interest during the deferment period, the accrued amount is added to your loan principal, which increases what you owe in the end.
To request a deferment, you need to submit a form to your loan servicer. You will probably be asked to provide documents proving that you’re eligible.
What If You Have Private Student Loans?
Private lenders aren’t required to offer deferment options, but some do. For example, some might allow you to temporarily stop making payments if you:
• Lose your job
• Experience financial hardship
• Go back to school
• Have been accepted into an internship, clerkship, fellowship, or residency program
• Face high medical expenses
Typically, even while your private student loan is in deferment, your balance will still accrue interest, meaning you’ll pay a larger balancer overall, even after the respite of deferment.
However, in most cases, even with accrual of interest and limited options, deferment is preferable to defaulting. If you have private loans, you could contact your lender to ask what options they have.
The Limits of Student Loan Deferment
Keep in mind that deferment is not a panacea. By definition, it’s temporary. You will need to go back to making payments once you’re no longer deferment-eligible. For example, your deferral might end if you leave school, even if your ability to pay has not improved.
You can only defer federal loans due to unemployment or financial hardship for up to three years, even if you’re still in the same situation after three years. With private loans, you may not have the option to defer at all, and if you do, most limit the deferment period to no more than a year.
Other Options for Reducing Federal Student Loan Payments
Besides student loan deferment, you have other choices if you can’t afford the total cost of your monthly payments. With federal loans, you can request a forbearance.
There are two types of forbearance for federal student loan holders: general and mandatory.
General student loan forbearance is sometimes called discretionary forbearance. That means the servicer decided whether or not to grant your request. People can apply for general forbearance if they’re experiencing:
• Financial problems
• Medical expenses
• Employment changes
General forbearance is only available for certain student loan programs, and is only granted for up to 12 months at a time. At that point, you are able to reapply for forbearance if you’re still experiencing difficulty. General forbearance is available for:
• Direct Loans
• FFEL Program loans
• Perkins Loans
Mandatory forbearance means your servicer is required to grant it under certain circumstances. Reasons for mandatory forbearance include:
• Serving in a medical residency or dental internship
• The total you owe each month on your student loan is 20% or more of your gross income
• You’re working in a position for AmeriCorps
• You’re a teacher that qualifies for teacher student loan forgiveness
• You’re a National Guard member but don’t qualify for deferment
Similar to general forbearance, mandatory forbearance is granted for up to 12 month periods, and you can reapply after that time. You still have to pay interest on all types of your federal loans while they’re in forbearance.
A longer-term solution could be signing up for an income-driven repayment plan.
If you qualify, you may be able to reduce your monthly payment based on your income. Enrolling in an income-driven repayment plan won’t have a negative impact on your credit score or history. However, income-driven plans aren’t always the lowest monthly payment option, so you might want to look at all options before applying to one.
On certain income-driven repayment plans, student loan balances can be forgiven after 20 or 25 years, depending on the payment plan you are eligible for. Remember, with an income-driven repayment plan, your monthly payment is based on your total income.
That means if you change jobs, or see a significant increase in your paycheck, you’ll be expected to pay a higher monthly bill on your student loan payment.
Another long-term solution, depending on your financial circumstances, could be student loan refinancing. Some private lenders can consolidate your loans, whether federal or private, and potentially offer you a lower interest rate or options to lengthen your term to reduce monthly payments.
Refinancing could be a good option if you have good credit and a solid income, among other factors. Unlike an income-driven repayment plan, your monthly payment wouldn’t change if your income increases.
If you don’t qualify for student loan refinancing on your own, some lenders may let you apply for refinancing with a cosigner. Student loan refinancing might be a good long-term solution for those who don’t plan to take advantage of federal income driven-repayment plans or other federal benefits.
Refinancing your federal and private loans can roll many loans into one new loan with one new monthly payment. So in addition to potentially saving you money on interest, refinancing could also simplify your repayment process.
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