The US Department of Education provides student loans to those borrowers who need help to fund their educational goals. It is not only free to apply but also comes with a lot of features and offers. Plus, the department offers free counseling to all the applicants to ensure they use the money wisely.
The federal government guarantees most student loans. So failing to pay them off can land you in an unpleasant situation. The pandemic has been harsh on all of us. So if you are a beneficiary of a federally held student loan, they have deferred the repayments until the end of 2020. But there can still be times when you find it challenging to repay the amount. What to do in such a scenario?
In this article, we discuss 5 options to consider if you cannot pay your student loans.
What can you do if you cannot pay your student loans?
Unless in an exceptional circumstance, defaulting on a student loan is similar to non-payment of a credit card. Unfortunately, being backed by the federal government, the debt collection procedure can be much more stringent and unpleasant for you.
If your student loan is over 90 days overdue, you are officially a “delinquent.” It will result in your credit rating taking a hit, and employers and service providers can deny you several vital services such as a postpaid connection.
If your student loan is over 270 days overdue, you are officially “in default.” The federal government can relinquish your tax refund, paycheck (a portion of it), and try other means to get their dues.
Here are five options to consider if you cannot pay your student loan -
Talk to your loan providers.
It is not unusual for a student to be unable to pay back their loans. Instead of fretting about it, it is important for you to contact your lender before you stop payments. Lenders have programs that can offer flexibility in the short or long term that can help you make your repayments more convenient. These programs could help you escape from defaulting on your student loan.
Tweak your repayment plan
For all those holding a federal student loan, the government has curated several repayment plans to ease your amount due. Here, you can get a loan ranging between 10 and 25 years.
You can opt for several programs such as PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn), or IBR (Income-Based Repayment). IBR is a very flexible option, considering that you can change your plan as your income changes. If you opt for a lower payment option, it would be advisable for you to switch again if your income goes up.
For private loan holders, you can contact your lender and request for information regarding changes to your loan duration and repayment.
Types of federal repayment plans you are likely to find
If you have a federal student loan, here are the options you are likely to come across –
Income-driven
You can select a pay-as-you-earn repayment plan. These cost more than the usual term loans, but offer more flexibility. You can either opt for the REPAYE or PAYE option. The former cap your repayment at 10 percent of the total monthly earning and recertified every year as per your updated paycheck.
The PAYE plan is similar to the REPAYE option but is available only when your debt is considerably higher than your income.
Standard, graduated and extended
If the income-based repayment doesn’t cut it for you, you can opt for a standard, graduated, or extended plan. The standard option has fixed monthly outflow, whereas graduated opts for an increasing option. If you want a mix of both, you can opt for the extended plan.
Apply for deferment or forbearance
These are free programs made available for federal student loan holders. Forbearance refers to a request made to the lender about your inability to repay the loan for the next few months. Deferment refers to an act of putting your payment on hold for the next few years because of economic hardship or any other reason.
It is feasible for you to request for deferment first. In case the lender denies it, you can then file for forbearance. In federal backed loans deferment, the federal government will cover the interest, whereas in the other option, interest continues to accrue, and you will have to pay at a later date.
Consolidate your student loans
If you have multiple student loans and are finding it challenging to repay some or all of them, it is time you consider consolidation. This option is widely available for federal loan holders, and you can opt for it with no additional fee. In the case of private loans, consolidation could be more challenging.
Why opt for consolidation? It lets you pay a lower interest every month. What is the cost you pay? Since the term of a consolidated loan can be significantly higher than the existing ones, you will most likely spend more over the loan’s life. So you must act diligently and weigh the benefit of lower payments to a longer payment period before taking a call.
Look for refinancing options.
Refinancing is often a viable option for letting you settle for a better interest rate or lower loan term. It would lower your interest outflow and work when you cannot pay the dues. But there is a catch. As of now, you can only refinance via private lenders. It means you will lose several benefits available with a federal student loan.
You can only pull the refinancing trigger when you are sure of your ability to repay. Also, think it through if you are willing to lose the federal benefits available for borrowers.
Preventing your loans from entering collections is very important.
An overdue student loan can become a considerable burden for the borrower. The lender can hire a collections agency where in cases you will end up paying a fee up to 40 percent on your loan balance. Loans in default can be collected from your paycheck and tax refunds. Loans in default will not be eligible for forbearance or deferral.
Don’t let your credit rating take a massive hit. Instead of merely sitting and pondering about it, it is time you seek help. Reach out to Plaata.com for assistance and have a look at various alternatives available for you.