You might look carefree as you throw your mortarboard in the air on graduation day, but you’re already feeling a heavy weight on your shoulders. According to Debt.org, 72 percent of students go into debt to cover the increasing costs of higher education. However, the Wall Street Journal reports nearly five million people have debts currently in default, meaning their payments are 270 days or more past due.
Defaulting on your loans can have serious consequences. Federal Student Aid warns a federal loan in default will be accelerated, meaning the total amount will immediately become due. If you can’t pay it, your loan servicer can take you to court, seize your assets, and garnish your wages. Your tax returns and other benefits will go into Treasury offset, and you’ll be ineligible for any future federal aid. Even declaring bankruptcy won’t cancel student debt.
“Defaulting on your student debt can have a domino effect on your finances,” says Mark Andrus of Lexingtonlaw.com. “A lower credit score can negatively affect your ability to obtain insurance, sign up for utilities, and get a cell phone plan. Additionally, some employers may not hire applicants who have previous debt problems and federal employees may be denied a security clearance.”
Before you find yourself homeless, powerless, jobless, phone-less, and penniless, here are six steps you can take to avoid this downward spiral.
- Do your homework.
In her article for Credit Sesame, Liz Stapleton explains how most students take out new loans each year and have a combination of federal and private loans, all of which are outsourced to different loan servicers with different policies. If you’re confused about what you owe to whom when, you’re not alone. Fortunately, you have the college-level skills to figure it out.
Take good notes and keep organized records. Research student debt through the Consumer Financial Protection Bureau. Use Excel spreadsheets to calculate interest and create charts and graphs to compare different payment options. Network with alumni who are facing similar challenges.
If your loans have a grace period before you need to start paying, use the time to come up with the best plan of attack. Managing student debt doesn’t stop once you’re making your payments on time. Use Google Alerts to stay informed about new laws and policy changes that could impact your finances.
- Switch to an income-driven repayment plan.
Plan A was to land your dream job and earn a three figure salary. Plan B was to get some job in your field that would at least give you a return on your college loan investment. Unfortunately, you’ve had to temporarily resort to Plan F, which involves the phrase “Do you want fries with that?” Minimum wage seems like a recipe for default, but it doesn’t have to be.
At the first sign of trouble with your federal loans, before you’ve missed any payments, apply for an income-driven repayment plan. Your monthly payment will be calculated based on your income, family size, and poverty guidelines in your state. The downside is that you will be repaying the loan for up to 20 years, but any balance remaining at that point will be forgiven.
Maybe your career is starting to take off, but you’re putting in a lot of hours and it’s getting more difficult to keep track of all your loans and avoid late payments. Consolidation is a way to combine all your federal loans into one convenient monthly payment, which will be lower than the total of the multiple payments you were previously making. If one of your federal loans doesn’t qualify for income-driven repayment, consider consolidating with other loans that do.
If you have private loans that don’t offer the flexibility of federal payment options, there are things you can do to reduce the amount you’ll actually owe. Refinancing your loans involves taking out a new private loan to pay for the rest of your loans. Stapleton explains that refinancing can save you thousands of dollars if your new interest rate is substantially lower than the interest rates of your original loans. You can also choose to refinance through the lender with the most favorable policies and cut ties with the Scrooge McDucks of the world.
- Defer your loans.
Sometimes life takes an unexpected turn, and you find yourself unemployed. Other times, you might leave a paid position for an opportunity with other rewards, such as a graduate fellowship or internship. If you are unable to pay your loans because of special circumstances, you may not have to.
By requesting a deferment before missing any payments, federal and some private lenders will hit pause on your loans without causing any damage to your credit. In the case of subsidized federal loans, your debt will not accrue any interest until your payments start again. Your deferment can last up to three years, but remember that your debts will have to be paid eventually.
- Request forbearance.
Let’s say your zoology internship in the Amazon rainforest was a blast until a spider bite nearly cost you a leg. You planned to return to work by now, but you’re still suffering the effects of the venomous beastie. If you experience unusual economic hardships that don’t qualify for deferment, there’s one more option.
Forbearance is similar to deferment, but lenders will still collect interest on your debt while you are not making payments. Mandatory deferment covers specific situations all federal loan servicers are required to accommodate. General deferment pertains to everything else and is at the loan servicer’s discretion. Private loan servicers are not required to follow federal guidelines, but it never hurts to ask if they’ll cut you a break. One thing all loan servicers have in common is that they want to avoid your loan going into default as much as you do.
How are you keeping your college loan payments manageable? Let us know in the comments.