What happens when you cannot make a payment on a student loan? Most people take out student loans with the expectation of being able to repay them when they finish their education and get a job. Yet, life happens, and in some situations, it can be hard to know your options for repayment of these loans.
Understanding Your Student Loan Debt
When taking out any loan, you should know as much about it as possible. That includes:
- The type of loan you are obtaining, including who is issuing the loan.
- The interest rate on the loan, including when that loan term applies.
- The loan's length, including when debt repayment begins.
You should also learn as much as you can about your legal options for getting out of the student loan if you cannot make a payment or getting help if you cannot make a payment on time. Loans are legal contracts you are obligated to repay, or if you do not, you could see the lender seek legal action against you.
Consequences of Default
Student loan default occurs when you do not make payment on time or under the rules set by the promissory note (your contract) with the lender. Every lender sets their terms for when defaulting occurs. It's not just a late payment but often numerous late payments that lead to several months behind your debt.
Your student loans are not automatically in default if you are behind on a payment. Lenders have particular terms that apply to trigger a default. In all cases, you're behind on your debt, and there are consequences of defaulting on student loans, including:
- You could face legal action in a court of law.
- You could have your wages garnished.
- Damage to your credit score can occur.
- You may have to pay debt collection fees.
- You may have to deal with creditors contacting you.
That can make it harder for you to obtain utilities for your home, car insurance, or get some types of jobs.
Working with Your Loan Servicer
To avoid student loan default, speak to your loan servicer as soon as you know you will be late on your payment. That means contacting the company you pay monthly to discuss your options for getting caught up. They can help structure your debt to make it more affordable to repay, at least in the short term.
Creating a Repayment Plan
If you know you will be late on payments or are already struggling to keep your payments made, contact your loan servicer to discuss the options for a repayment plan. A repayment plan adjustment will allow you to create a new payment schedule that better fits your needs. That may include a lower monthly payment, for example.
A standard repayment plan is available to most borrowers. It will allow you to set a fixed monthly payment for your loans to pay off your debt within ten years. Some people may benefit from a graduated repayment plan, one in which the initial monthly payments are much lower and they grow in value over time. Every two years, in most cases, the amount will increase with the same goal of paying off the debt in full in 10 years. Extended repayment plans may be available to some borrowers. These extend the time to repay your debt for up to 25 years.
Deferment and Forbearance Options
Not everyone can make payments right now. That is where deferment and forbearance come into play. Remember that with either method, interest will apply when you are in the non-payment period. That means the amount you owe will increase.
Deferment is a temporary hold on your payments. That is allowed during certain times, and interest during this time may not accrue. Forbearance is different in that it is a period in which you do not have to make payments, or there is a reduction in your payment amount. This option is available to those who are facing financial hardship.
Income-Driven Repayment Plans
Sometimes, you can work with your loan servicer to create a payment plan that suits your needs. Other times, your income is a concern. An income-driven repayment plan is available to low-income borrowers. With this plan, you base the amount you pay on your income and family size.
Loan Forgiveness Options
There are some situations in which loan forgiveness is an option. Loan forgiveness is not available to everyone and depends on your loan type, the type of work you do, and your overall limitations. For example, some people who work as teachers or public service workers may be able to apply for forgiveness. If you are permanently and completely disabled, that may also help you to qualify.
Getting Professional Help
Understanding your options for avoiding student loan default is critical. Your first step should be a conversation with your loan servicer. Still, you can also contact a professional for more information and guidance on your alternative options.