If you’re having trouble paying your student loans, you’re not alone. More students are taking out more in loans than ever, and it can be hard to make those payments once you graduate—especially if you have other debt and financial obligations.
In 2018’s graduating class, 69% of students took out loans and those who did leave school with an average of $29,800 in debt. For a lot of those graduates, when their private student loan payments are too high, they end up missing payments and potentially defaulting.
A report on student loan default from the Urban Institute predicted 40% of borrowers will default by 2023. The odds of default vary based on background and amount of other debt carried—they found 32% of those who borrowed less than $5,000 defaulted within the first four years and 15% of borrowers with more than $35,000 defaulted in the same timeframe.
That’s still a good percentage of people who can’t pay their student loans. If you’re in the same position, make sure you understand your student loans, both federal and private.
For the purposes of this article, we’ll look at what can happen if you don’t pay private student loans. Then you can start to weigh some options if you can’t afford your student loan payments.
What Happens If You Don’t Pay Your Private Student Loans?
Each private student loan lender will likely be a little different, but generally, missing a student loan payment can put your loan into delinquency, and may incur late fees and/or penalties.
In addition, depending on the loan, interest can accrue on those penalties and on the unpaid principal loan amount, which then can get added to how much you owe. If you miss too many consecutive payments, you may be at risk of defaulting on the loan.
Each private lender has their own terms that trigger student loan default. That typically means multiple missed payments. Even if you declare bankruptcy, it’s unlikely your student loan debt goes away. It’s important to check the terms of your private student loans, since they vary by lender.
Once a student loan goes into delinquency or default, it will likely affect your credit score. That can possibly affect your ability to take out loans in the future or achieve other financial goals, like buying a house.
In addition, once a private student loan goes into default, the lender can send it to collections.
If you can’t pay your private student loans, you could ultimately face a judgment that could result in a garnishment of your wages. (There are, however, some protections and rights you have when it comes to debt collection on student loans.)
Ideally, if your student loan payments are too high, you might consider other options before risking delinquency or default.
What If You Can’t Pay Your Federal Student Loans?
The first thing you might consider is separating your federal and private student loans. Federal loans often come with more protections and options for repayment plans.
For example, federal loans typically offer income-driven repayment plans based on your income and family size, relative to the amount of student debt owed. There are also required forbearance and deferment clauses on federal loans available to qualified borrowers.
Even though federal student loans (both subsidized and unsubsidized) are government-backed and originated by the U.S. Department of Education, they’re administered by a student loan servicer, which is a private company in charge of the loan. This does not make these loans “private” student loans.
It means you might be making your payments to a private loan company, but it’s still a federal student loan and still comes with federal student loan protections.
Options If You Can’t Pay Your Private Student Loans
If your private student loan payments are too high, however, then the options are slightly different because every private loan lender sets its own terms and conditions. While there are fewer options if you can’t make your private student loan payments, there are still some things you can consider.
1. Talking to Your Lender
If your private student loan payments are too high, then it might be worth talking to your lender.
You could start by getting a copy of your promissory note so that you know all the terms and conditions of your specific loan.
Each private lender sets out its own repayment and deferment options, so your loan may differ from your friends’ loans.
Lenders, however, want to get paid, and it’s not in their interest for you to default. Once you have the terms of your loan in hand, then you can try talking to your private lender about potential alternative student loan repayment plans to see if they’ll work with you on what you can afford or even if you might be able to put your loan payments on hold if you need to.
For example, SoFi offers an unemployment protection plan on its loans, allowing eligible members to temporarily halt payments if they lose their job.
2. Deferment and Forbearance Options
In certain circumstances, deferment and forbearance are available to temporarily put payments for federal loans on hold. However, for private student loans, forbearance and deferment options are not required, but any specifics will be laid by your lender.
Private lenders may offer forbearance and/or deferment in certain circumstances, such as returning to grad school or entering active military duty. If you can’t pay your private student loans, then you may want to see if your lender offers these options.
It’s important to know, though, that in most cases, interest continues to accrue and compound during forbearance or deferment on private student loans. That means the interest on the amount you owe builds up and gets added to the loan principal (which then accrues its own interest), and could end up costing you more in the long run.
3. Making a Student Loan Repayment Budget
This may sound obvious, but it can be important to create a plan and budget for repaying your student loans. Cutting back on some expenses or looking for additional income to allocate towards student loan payments could pay off in the long run.
Because student loan interest accrues and compounds over time, every little bit paid off now can save more money later.
In addition, if a borrower makes as many payments as possible on time, it could save late fees or additional penalties.
There are a few principles for how to tackle student loan payment.
You can also benefit from prepaying more than the minimum monthly payment. If you allocate additional payment towards your loan principal, then you won’t accrue interest on that principal you paid down, and you could save yourself money.
4. Refinancing your Student Loans
If your private student loan payments are too high, one way to potentially lower your monthly payments could be to refinance your student loans by extending your term.
If you need lower monthly payments right away, extending your loan term is one way to accomplish this (keeping in mind that a longer-term means you’ll likely pay more in interest over the life of the loan).
Once you’re on more solid financial footing, refinancing could qualify you for a lower interest rate, which could save you money in the long run (since interest adds up and compounds over time).
Lowering Your Student Loan Payments
If you’re struggling to make your student loan payments, then refinancing your private student loans with a longer-term could lower your monthly payments—which could free up money you may need for bills and other necessities.
If your credit score or financial outlook have improved since you first took out student loans, however, then you might be able to qualify for a new loan with better terms and a lower interest rate. When refinancing with SoFi, there are no application or origination fees, and there’s no penalty for paying off the loan early.
Consolidating federal loans with private loans, even at a new interest rate, however, does turn the federal loans into private loans. That means you would lose access to federal benefits, such as deferment, forbearance, or income-driven repayment plans.
Refinancing just a private loan creates a new private loan with new terms, and you can keep your federal loans separate if you choose.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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