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It's one of the worst things you can face when it comes to your student loan debt – yourself You can't afford your student loans. Maybe you've left school and received your first bill and don't know how to pay it.
Or maybe you've been using deferments and forbearance on and off for years, and every time you're asked to start repayment, you just don't think you can afford it.
Unfortunately, too many people don't take advantage of their student loans – even if they can't afford it. This is why, according to the Department of Education, over 7% of student loans are in default.
But simply ignoring it or defaulting on payments is not a solution. There are better (and cheaper ways) to handle paying off a student loan you can't afford.
If you're not entirely sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend Student Loan Planner to help you create a solid financial plan for your student loan debt. Checkout The student loan planner Here.
Let's break down the options here.
Best Solution – Get an affordable repayment plan
If you cannot afford to repay your student loans, the BEST thing to do is change your student loan repayment plan to a more affordable plan.
Most people are simply unaware of the options – especially income-driven repayment plan options. When you graduate college, the first bill you receive will be based on the standard 10-year repayment plan. This is typically the highest repayment amount you will face – and therefore the most difficult to afford.
However, there are cheaper options (including plans that offer possible student loan forgiveness). For example, you might consider:
Income Based Repayment (IBR) – If you have loans before July 1, 2014, your payment will not be higher than 15% of your discretionary income. With this plan, you make payments for 25 years, at which point your loans are forgiven.
If you are a borrower with loans after July 1, 2014, your loan will not exceed the maximum term 10% of your discretionary income, and the loan is forgiven after just 20 years. Read more about IBR here.
Pay As You Earn (PAYE) – With PAYE you don't pay more than 10% of your discretionary income, and your loan will also be forgiven after 20 years. This program is sometimes referred to as Obama Student Loan Forgiveness.
SAVE – This repayment plan limits your payment to 5-10% of your discretionary income, and the loan is forgiven after 20 years. From 2024 it will offer further advantages such as: E.g. setting your payment at 5% of your discretionary income! Read more about the new SAVE repayment plan here.
Income-Related Repayment (ICR) – Under this plan, your payments will be less than 20% of your discretionary income or the amount you would pay under a fixed payment repayment plan over 12 years, adjusted for your income. With the ICR plan, your loans will be forgiven after 25 years.
Keep in mind that with any of these plans, your student loan payment could legally be $0 per month if your discretionary income is low enough. This is a great deal because you pay nothing but are still on the right track if you need loan forgiveness.
That's why these plans are the best solution if you can't afford to repay your student loans.
Okay, solution – postponement or forbearance
What if you can't even afford the above income-driven repayment plan? What if the student loan payment is still too high? Well, this is the lowest rate you'll ever get on your student loan, so you need to watch your budget.
However, if you just need a temporary payment break to balance your budget, a student loan deferment or forbearance may help.
A student loan deferment or forbearance is an approved break in repaying your student loans. During this pause, interest will continue to accrue on your loan, but you will not be required to make any payments. This can be the perfect break you need to align your budget so you can begin income-driven repayment in the future.
However, remember that any reprieve or forbearance is only temporary. Most deferments last between 6 months and 3 years. After that, you need to start repaying your loans.
Once you've exhausted all of your deferment, you'll need to complete an income-driven repayment plan as soon as possible.
Possible tip: If you go back to school at least half-time, your federal loans will be deferred again.
Bad solution – missing student loan payments
The worst solution you can choose is to simply not make your student loan payments. However, if it's the difference between eating out this month and paying a student loan, then of course you need to provide for yourself and your family.
However, before you miss a payment, you need to try to get a deferment or change your repayment plan to something you can afford.
Most of the time, I see people who miss their payments because they simply don't know that there is a cheaper alternative to their student loan payment. So before you miss a payment, call your lender and discuss it or log on to StudentAid.gov and review your repayment plan options.
Related: If you've fallen behind, you'll be entitled to a fresh start when student loan payments resume. Learn more about the Fresh Start program here.
Private Student Loan Solutions
If you have a private student loan, there aren't many options for reducing your student loan payment. We've already discussed private student loan options and they aren't pretty.
In general, you can follow two approaches:
- Call your lender and ask for help
- Refinance your student loans (probably with the help of a cosigner)
Start by simply calling your lender. Although rare, some lenders offer programs to help you if you cannot afford to repay your student loans. Many of these involve job loss, and you usually have to agree to some terms to get help.
Second, you should consider refinancing your student loans. You may be able to get a longer term (which lowers your payment) or lower interest rates (which can lower your payment but also save you money).
We recommend using it Credible to compare your options quickly and without a credit check in 2 minutes or less. Additionally, College Investor readers will receive a gift card bonus of up to $1,000 when they refinance with Credible. Check out Credible here.
Final thoughts
It's scary and stressful not being able to afford your student loans. However, there are options you can take before you miss out.
If you're not entirely sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend Student Loan Planner to help you create a solid financial plan for your student loan debt. Checkout The student loan planner Here.
Make sure you know the solutions and how to implement them before you miss your payments. Falling behind on your student loans and potentially defaulting on them is not a good idea.
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