What Should I Do If I Can't Afford My Student Loan Payments?
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This month, millions of borrowers are making their first federal student loan payment in three and a half years. During this time, you may have moved, bought a house, purchased a car, had kids, adopted a pet, paid off debt, taken on new debt, lost a job, and gotten a new job. Even without any of these big changes in your life, your financial landscape probably looks a lot different than it did in March 2020. If you find that your student loan payment is stretching your budget, it’s time to consider other options.
Readjust your budget
Start by taking stock of your expenses. We recommend going through your recent statements and/or transactions for all of your debit and credit cards. Did I say all? Yes, ALL of them. To streamline this process, load your accounts into a budgeting app like Quicken Simplifi or Rocket Money so you can review all of your transactions in one place.
After reviewing your expenses, cut what you don’t use or need and keep track of how much cash flow you’re able to free up. If your savings exceed your payment, you’re golden. If cutting back doesn’t quite get you there, it will certainly help get you closer.
Apply for an alternative repayment plan
You may be eligible for a lower monthly payment under a different repayment plan, such as an income-driven repayment plan. The new Saving on a Valuable Education (SAVE) plan is expected to provide the lowest monthly payment for low-to-middle-income borrowers. The extended and graduated repayment plans may be better for higher-income borrowers who also need a break. The extended repayment plan lengthens the term of the loan, thereby lowering the payment. Graduated plans start out with a lower monthly payment that increases every two years.
Use Federal Student Aid’s loan simulator or contact your loan servicer to review your options. You can also check out Savi, which has a free tool that can help you take control of your student loans. Savi can do everything from making sure you have the best repayment plan to filling out all your paperwork correctly!
Consolidate and stay on the standard repayment plan
Consolidating your federal student loans can also lower your payments. The savings come from extending your payoff timeline (not from a lower interest rate). Consolidating turns all of your little student loans into one big loan with the same equivalent interest rate, but it also resets the repayment term on the standard repayment plan. For example, if you have been paying off your loans for 4 years before consolidating, it will take you a total of 14 years to pay off your loans on the standard repayment plan. Because you’re paying off the same amount of debt over a longer period of time, your payment will be lower but you’ll pay more in interest.
Take advantage of the “on-ramp”
The Department of Education created a 12-month “on-ramp” that allows borrowers to avoid the worst effects of not making payments. During this time period, if you don’t make payments:
Missed payments will not be reported to the credit bureaus
You will not go into delinquency or default on your student loans
Interest won’t be added to your principal balance
However, unless you are on the SAVE plan, interest will still accumulate during this time meaning that you will end up with a higher overall balance at the end of the on-ramp period so it’s still worth making some or all of your payments if you can. There is no application—it’s automatically in effect until October 2024.
Find out if you’re eligible for deferment or forbearance
Both deferment and forbearance offer temporary relief from student loan payments. They can help when you need to pay less or nothing at all while you work on cutting expenses and finding additional income to meet your student loan obligations. These options are typically only available if you are experiencing financial difficulties or meet other specified criteria. You can review the requirements for deferment and forbearance at studentaid.gov.
If your loans are approved for forbearance, interest will continue to accrue. You have the option to make monthly payments to cover the interest or allow it to be added to your principal at the end of your forbearance period.
If you qualify for deferment, any subsidized loans will not accrue interest, so this is usually a better option if it’s available to you. If your loans were given based on financial need, they are considered “subsidized,” but check with your loan servicer to be sure.
Refinance private student loans
By this point, if you have private student loans, you may be wondering, “What about me?” Some private lenders offer forbearance but it’s typically not as common or generous as federal forbearance.
Refinancing is your best option to reduce your monthly payment. Unlike consolidation, this may give you the opportunity to actually lower your interest rate — especially if your credit score has substantially improved since you took out the loan. It also sets a new repayment term which generally has the effect of extending your payoff timeline but lowering your payment.
Even if federal student loan borrowers can also reduce their interest rate and payment by refinancing, we generally don’t recommend it. Refinancing a federal student loan will remove all of the benefits that federal student loans offer — for example, a pause on interest and payments during a pandemic for three and a half years.
Meet with a Financial Gym Trainer!
We have a Trainer-on-Demand service that can help you work through these options and other personal financial questions as well! If you want a dedicated trainer, you can check out our personal 1-on-1 coaching service.