Congrats, Class of 2014! You've earned your degree and now you're heading off into the real world. If you're like many other recent graduates, you may have also graduated with student loans. Knowing what to do next with your student loan payments can be difficult and confusing if this is the first time you have ever taken out a loan. After you graduate, you're automatically granted a six-month grace period before your monthly payments begin. But what happens after those six months if you're still out of a job or not making enough money to afford your monthly payments?
Here's what to do if you can't pay your student loan:
- Don't Panic: Remember that you are not alone. You are not the first person who is having trouble with their student loans. The lenders are very familiar with this scenario and deal with borrowers all the time who may not be able to make a full payment. They have programs available to assist borrowers, but they cannot do anything for you unless you contact them.
- Tell Your Lender: Ignoring your payment obligation can have serious consequences and will probably affect your credit score for the next few years. If you're worried that you won't be able to make your monthly payments, the first thing you need to do is to contact your lender. Telling your lender upfront that you're worried about making payments may allow you some time to figure out what step to take next. Your lender may be able to give you a variety of options for payments and postponement.
- Ask About Your Payment Plans: An easy way to lower your monthly payments without damaging your credit score is to change your monthly payment plan. Ten years is the standard repayment period on a student loan, but there are payment plans that allow you to extend the repayment period to 25 years. Additionally, you don't necessarily have to pay the same amount every single month.
The federal government currently offers the following repayment plans:
- Standard: You pay the same amount each month for 10 years
- Graduated: With this plan, you make lower payments in the first few years, and then the payments are gradually increased every two years until the loan term is up
- Extended: Your payments are stretched across 25 years (instead of 10). Payments may be fixed or graduated.
- Income-Based: You're assigned monthly payments based on how much you earn and your payment changes as your income changes. Your payments are made over a 25-year period. Your maximum monthly payments will be 15 percent of your discretionary income.
- Pay-As-You-Earn: Similar to the income-based plan, your payments change as your income changes. Your payments are made over a 20-year period. Your maximum monthly payments will be 10 percent of your discretionary income.
- Income-Contingent: Your payments are calculated each year and are based on your adjusted gross income, family size and the total amount of your loan. Your payments will change as your income changes, and payments are made over a 25 year period.
- Look into Postponement Options: If you still can't afford your monthly payments after looking into all of the repayment options, you also have the option to postpone your payments. When looking into postponing your payments, you have two options: deferment and forbearance.
- A deferment allows you to temporarily stop making payments on your federal student loans. You won't be charged a fee for applying for deferment, but interest will continue to be charged during deferment on your Direct or FFEL Unsubsidized and PLUS loans. Some qualifying factors for deferment include being enrolled at least half time at an eligible post-secondary school, doing full-time coursework in graduate school, being unemployed or unable to find full-time employment, serving on active duty and other factors determined by the Department of Education.
- If you're not eligible for a deferment, you may be eligible for forbearance. Similar to deferment, you are never charged a fee for applying for forbearance but you will continue to be charged interest during forbearance on all types of loans. You may be granted forbearance if you are unable to make your scheduled loan payment due to financial hardship and illness, are serving in a medical or dental internship or residency program, are serving in an approved Ameri-Corps position, or meet other criteria as determined by the Department of Education.
- A deferment allows you to temporarily stop making payments on your federal student loans. You won't be charged a fee for applying for deferment, but interest will continue to be charged during deferment on your Direct or FFEL Unsubsidized and PLUS loans. Some qualifying factors for deferment include being enrolled at least half time at an eligible post-secondary school, doing full-time coursework in graduate school, being unemployed or unable to find full-time employment, serving on active duty and other factors determined by the Department of Education.
- Research Loan Cancellation and Consolidation: In certain circumstances, you may be able to cancel your student loans. Doing this isn't easy, and most people don't qualify for cancellation. In order to qualify, you'll have to meet certain requirements depending on the type of loan you have. Your lender will be able to tell you if you qualify for loan cancellation. If you have multiple federal loans, there are benefits to consolidating your loans into one loan. When you combine your loans, you'll have the convenience of making a single monthly payment. Consolidation generally extends the repayment period, which will help lower your monthly payment.
If you're worried that you won't be able to pay your student loan, there are many options to consider. The bottom line is that taking action is better than not taking action. Loans are tied to your name, and the longer you wait to take action, the worse off you'll be in the long run.
