Did you know that over 43 million Americans are currently struggling with student debt? According to standard student loan terms, repayment begins six months after the student graduates from his or her educational institution, regardless of whether or not he or she has secured a job. While failing to keep up with the payments can take a serious toll on your financial health, a range of student loan solutions exist to provide relief.
What Happens If You Are Unable to Keep Up With Student Loan Payments?
Student loans are legally binding, meaning that the lenders have the right to collect on the amount that you owe them. If your student loans go into default, you may be charged interest in addition to the original amount, due immediately. The lender is sometimes able to garnish money from tax refunds or social security, meaning that a percentage of those payments will go directly towards your student loans.In extreme situations, the lender may take you to court. Liens can be placed on your home and bank account, resulting in a loss of the assets you've worked hard for. At a minimum, your late or uncollected payments will be reported to the credit bureau, which could ruin your score and jeopardize your chances of qualifying for a car or home loan in the future.
Struggling With Student Debt? You Are Not Alone
The cost of higher education has risen exponentially in the past 30 years. While it was once possible to get a degree for an annual cost of under $5,000 from a public institution or under $20,000 from a private school, students today can expect to pay between $10,000 and $38,000 per year. Over half of these students take on student loans.More than $1.75 trillion is owed in student debt, with the average borrower being personally responsible for over $28,000. A significant portion of these loans goes into default, with still more entering a state of forbearance or deferment. The loans that are currently in default account for more than $112 billion, owed by over five million people.
How Student Loans Are Structured
Types of Repayment Plans
The vast majority of student loans are supplied by the federal government, which has a number of repayment plans. According to the Standard Repayment Plan, you will fulfill your financial obligations within 10 years at the lowest interest rate offered. The Standard Repayment Plan is automatically applied to a borrower unless he or she opts out.There are a number of other repayment plans that could decrease your monthly payment and, in some cases, bring it down to $0. These programs include:
- Pay As You Earn (PAYE)
- Repay As You Earn (REPAYE)
- The Income-Based Repayment Plan (IBR)
- The Income-Contingent Repayment Plan (ICR)
Calculating a Reduced Monthly Payment
The idea behind the programs listed above is that making your payments should not strain your finances to the point where affording a minimum standard of living becomes impossible. For all four plans, the payment is set at 10-15% of a person's discretionary income. Discretionary income is the difference between your income and either 150% or 100% of the federal poverty line, depending on the program.
When Are Student Loans Forgiven?
Some federal programs facilitate the complete forgiveness of student loans, but only for a small portion of the country's borrowers. Teachers and members of the U.S. Armed Services can often have their student debt discharged. Additionally, if your school closed before you could complete your program or engaged in fraudulent activities, you may be relieved of your obligation to pay student loans. Severe or permanent disability can also warrant loan forgiveness.
How Can You Get Your Student Debt Under Control?
The worst consequences of defaulting on your student loans are far from inevitable. Some individuals qualify for debt forgiveness, while others can consolidate their loans to make them both more manageable and potentially more affordable.
Improve Your Income to Expenses Ratio
Many individuals struggling with student loans are forced to cut their expenses and increase their income, often by taking on a part-time job. If you have not taken a good look into your spending habits, some budgeting could improve your financial health. However, given the large amount of student debt many individuals carry, the number of hours you would need to work and the expenses you would need to cut in order to make your payments may not be feasible.
Exercise Your Options for Going Into Forbearance or Deferment
When a loan goes into forbearance or deferment, the borrower is temporarily relieved of the obligation to make monthly payments. During the 2019 COVID-19 pandemic, the government suspended student loans and set the interest rate at 0%; however, payments are scheduled to resume at the end of this year.If you have experienced financial hardship or other circumstances that merit forbearance or deferment, you should contact your lending institution to explore these options. You may qualify to have your loan payments paused for a limited period of time if:
- You are still enrolled in school or a graduate fellowship program
- You are in rehabilitation
- You are unemployed and currently looking for work
- You are serving active duty in the military
- You have incurred unforeseen medical expenses
- There has been a significant change in your income
- Your monthly loan payments exceed 20% of your income
- You can present another acceptable reason to your lender
Direct Loan Consolidation
Oftentimes, the financial problems resulting from student loans stem from the fact that the debt is spread across multiple lenders. Borrowing from several different sources is common for individuals pursuing a degree that requires more than one year of schooling. When a borrower has multiple loans to keep track of, it can be difficult to remember all of the payments and keep track of the total amount that he or she owes. Additionally, some interest rates might be higher than others.Direct loan consolidation is a financial tool that can be useful if you have exceeded the limits of your forbearance and deferment options, or if you are in a position to make reasonable payments. When a borrower pursues debt consolidation, he or she takes out one new loan that covers the rest, resulting in a single monthly payment. Oftentimes, the interest rate on the new loan is less than the average interest rate of multiple loans.
Another viable option for resolving debt issues, including the ones that were brought on by unpaid student loans, is bankruptcy. While bankruptcy sometimes necessitates the liquidation of assets, it can offer a fresh start for many people. After an individual has declared bankruptcy, their student loans are usually discharged.Bankruptcy represents a dramatic restructuring of a person's finances, and it may or may not be the best solution in your case. Many people who want to declare bankruptcy find that they are unable to demonstrate the degree of financial distress needed to qualify. By speaking with a personal finance attorney, you can learn about the benefits of declaring bankruptcy and the potential alternatives.
Learn About Student Loan Solutions From a Legal Expert
The financial consequences of unpaid student loans can interfere with your ability to maintain good credit, purchase a home, and support a reasonable standard of living. An attorney who specializes in debt-related issues can guide you on the best ways to avoid default or regain your footing after you already have a number of missed payments against you. To learn more about direct loan consolidation and other student loan solutions, contact the Thomas K McKnight Law Office.