When I went through college, I didn’t think much about my student loan debt. I was aware that it was adding up — after all, I signed for a check every semester and watched my bank account balloon. However, all of my payments were deferred until I finished school. There is no need to make payments on your federal student loan (and even on many private student loans) if you meet school enrollment requirements. You don’t have to start paying until six months after you graduate in some cases.
But once that deferment is over, it might hit you all at once that you do owe tens of thousands of dollars. What if you can’t make the payments? The good news is that there are options for students looking for affordable student loan payments after the deferment period ends.
Federal or private student loans?
Before you start making any payments, it’s important to understand what type of student loans you have. Federal loans allow you access to specific programs that can ease your repayment. Private student loans, on the other hand, behave like any other loan in many respects. You can ask for further deferment or forbearance with a private student loan, but it will likely cost you more in the end.
Those with federal student loans have better options. “If you are still experiencing financial difficulty, you might be able to choose a repayment plan like income-based repayment or pay-as-you-earn repayment,” says Mark Kantrowitz, the Senior Vice President at Edvisors.com.
Federal student loan repayment plans are designed to help borrowers based on their income and household size. Payments are capped as well, so you don’t have to worry about them growing out of control later. Not only that, but federal income-based options provide for loan forgiveness after a certain number of years. If you haven’t paid off your balance after 20 or 25 years (depending on the program), the remainder might be discharged if you meet certain requirements. For those who enter public servant professions, there is also the possibility of discharge after 10 years.
“Income-based repayment and pay-as-you-earn repayment are intended to be safety nets for borrowers who are unable to afford their monthly payments,” says Kantrowitz. If you are struggling after the end of your deferment period, you can enroll in these programs at the Department of Education website. (Jay Fleischman, an attorney specializing in student loans, recommends enrolling in these federal repayment programs even before the end of your deferment period so that you can be considered in “repayment,” even if you don’t have a job and your payment is $0 per month.)
If you can afford the payments, though, Kantrowitz suggests paying as much as you can. “The borrower should choose the repayment plan with the highest monthly payment he or she can afford, such as the standard 10-year repayment,” he says. “This will save the borrower the most money over the life of the loan.”
While the lower payments associated with the income-based program are tempting, the costs will add up, and you will be in debt longer. Before you make the choice, it’s important to carefully consider your options, and your financial situation, and understand the tradeoffs you will have to make. Some students choose to enroll in the income-based program, but pay more than they are required to as their financial situations improve.
Is default an option?
If you have private student loans, default is an option once you have exhausted your deferment and forbearance options. However, just any other loan default can damage your credit rating, defaulting on a private student loan can hurt your credit score. The lender can also choose to sue you in order to collect repayment. It’s also important to understand that, even though the White House recently floated the idea of allowing for bankruptcy discharge of some student loans, right now the law is written so that you can’t get rid of your private student loans through bankruptcy.
You can’t discharge federal loans through bankruptcy, either, and default isn’t going to get you out of your obligation. “Defaulting on the student loans will not save the borrower any money, as the federal government can impose wage garnishment without a court order,” says Kantrowitz. “Wage garnishment involves a higher monthly payment than income-based repayment.”
If you can’t make your student loan payments at the end of your deferment period, the best option is to call your servicer and ask about income-based options or enroll through the Department of Education website. Some servicers will tell you about extended deferment or forbearance, but those options can be even more costly. While you might not have a choice with private student loans, you do have the income-based option with federal loans. Make sure you understand which loans are federal and which are private, and learn about your choices before you change your current plan.