Your Options When You Can't Repay Student Loans
It can be scary when you cannot pay back your student loans, and the consequences of defaulting on loans can be severe.
Several options are available to you when you cannot make the payments on your student loans.
These options include:
- Delaying payments on your loans through forbearance or deferment programs
- Getting your loan canceled and eliminating all payments (rare)
- Discharging your loan through bankruptcy proceedings (rare)
- Getting on an income-sensitive or income-based repayment schedule
- Consolidating your loans into one loan
Each option depends on eligibility requirements, your loan servicer, past student loan payments (if any), and the total amount of your education loan.
Student Loan Deferments
Deferments allow you to stop making payments for a specific time if you can show that you qualify. For instance, you may be able to get a deferment if you can show economic hardship, or that you have returned to school, are unemployed, or are looking for a job.
Depending on your type of loan, the deferment lets you stop making payments on the principal and stop interest from growing on the unpaid balance.
For other types of loans, you are only allowed to defer the loan principal. This means that interest on your loan will continue to increase while you are not making payments.
You will often be able to defer your student loans if you meet one of the conditions described below and are not currently in default. You may even be able to qualify for a deferment when you are in default in a "retroactive deferment."
Student Loan Forbearances
Loan forbearance happens when your loan holder allows you to stop making payments for a set time. However, you should keep in mind that interest will continue to grow during a forbearance. Your loan balance will be higher when you come out of the forbearance.
Generally, forbearances are easier to obtain than deferments because they are not linked to the type of student loans you have. This means they are not covered by the laws and rules that apply to student loan deferments and cancellations.
You may be able to obtain a forbearance for various reasons, such as poor health or unforeseen personal problems. You may be able to get a forbearance if:
- You foresee that you will not be able to pay back your student loans within the period for repayment
- Your monthly payments are more than 20% of your monthly income
Loan forbearances are generally granted for up to one year at a time. You may be able to get a forbearance even if you have defaulted on your student loans.
Bankruptcy and Student Loan Discharge
Discharging student loans through bankruptcy is almost impossible to accomplish under the current law, but it has been done.
Your student loans can only be discharged through bankruptcy if you can show repaying your student loan would be a severe hardship on you.
Courts consider many factors such as your age, health condition, income, expenses, family size, and the length that your income problems are likely to persist.
Cancellation of Student Loans
Like a deferment, to get a cancellation of your student loans, you will have to show that you fall into a specific situation depending upon the types of loans you have.
Also, cancellation does not always take care of an entire loan, and you may only end up getting a portion of your loan canceled. The remaining loan balance is still your responsibility.
Conditions for Deferments on or Cancellations of Student Loans
Here are the conditions that may allow you to defer or cancel your student loans. Keep in mind that some of the conditions may only qualify you for loan cancellation, others for both deferment and cancellation, and others for only deferment.
It may be possible to defer or cancel student loans if the borrower:
- Has died
- Is suffering from a permanent total disability
- Is suffering from a temporary total disability
- Is enrolled in a rehabilitation program for a disability
- Is unemployed
- Has an economic hardship
- Is currently enrolled in school
- Enters uniformed service
- Is teaching or serving a needy population
- Is performing community service
- Is working in the healthcare field
- Is working in law enforcement
- Went to a trade school
- Was a victim of identity theft
- Left school but never got a refund
Student Loan Extended Repayment Plans
Neither private nor federally backed student loans may be discharged in a bankruptcy filing. If the options outlined above are not right for you, you might want to consider various repayment options.
Do You Have a Federal or Private Student Loan?
If you have a school-issued loan (like a Perkins loan), you should ask your school about any repayment options that are available to you.
If you took out a loan from a private lender (such as a bank), you might be limited in your repayment options. Whatever the case, it is not wise to wait until your loans go into default before trying to figure out a solution. If you wait, some of your options may expire.
Also, keep in mind that the holder of your federal loan must allow you to change your repayment plan at least once a year.
Options discussed in this article are mostly limited to federal student loan repayment. If you are unsure what types of student loans you have, visit the National Student Loan System Website or call 1-800-4-FED-AID.
Standard Student Loan Repayment Terms
Although the monthly payments may be higher if you go with a standard repayment plan, it is still probably the best option for you if you can afford it. Because you will be paying more upfront, you will likely pay less interest in the long run.
Under a standard loan repayment plan, monthly payments are determined by the loan amount. However, you can expect to pay roughly $125 per month for every $10,000 you took out in student loans. Using a standard repayment plan, you will be making payments for a maximum of ten years.
Graduated Repayment Plan
Unlike a standard repayment plan, if you choose a graduated student loan repayment plan, your monthly payments will increase as time goes by. Usually, your monthly payments will increase every two to three years. However, just like a standard repayment plan, your loan must still be paid off in a maximum of ten years.
If you choose a graduated repayment plan, you can expect to pay more for your loan in the long run. You will be paying more in interest than you would under a standard repayment plan.
Income-Based Repayment (IBR) 101
If you have had a tough time finding a well-paying job out of school, then you may want to look into an income-contingent student loan repayment plan. This is sometimes called a "pay as you earn" plan.
Under this income-based repayment scheme, the amount of your monthly payments will vary as your income changes.
Your annual income will determine the cost of your monthly payments. Suppose you are married and file a joint income tax return. In that case, you will have to use your joint income to determine the amount of your monthly payments under an income-based repayment plan.
Direct Federal Student Loans: Income-Sensitive Repayment Plans
Most direct student loans from federal student aid are eligible for income-based repayment plans, excluding PLUS loans. Your annual payment will vary based on your income, but it will never exceed 20% of your discretionary income.
To get an income-based repayment, you must have an FFEL loan or a "direct loan."
Your discretionary income is calculated by your annual gross income minus the amount based on the poverty level for your household size.
If you have a very low income, your income-based repayment plan may not require you to make monthly payments at all. If you make payments, they may be less than the interest that your loans accumulate each month. Although this may seem like a big break, it could hurt you in the long run as you may end up paying much more on your loans than you would otherwise due to the accumulating interest.
You must pay off your student loans within 25 years (not counting periods of deferment or forbearance) on an income-based student loan repayment plan. If you do not, the federal government will forgive the remainder of your loans, but you will have to pay taxes to the IRS on the amount of your loans that are forgiven.
Non-Direct Federal Student Loans: Income-Based Repayment Plans
If you received a federal student loan (such as a Stafford loan, PLUS, or HEAL loan) from a financial institution, they would probably offer some sort of income-based repayment plan.
Because these loans are not from the government, there may not be any provisions in the agreements for loan forgiveness after 25 years. The payments may not be as low as they would be from a direct federal student loan.
Student Consolidation Loans and Refinancing
Loan consolidation can be a good idea because it may allow you to lower your monthly payments by:
- Grouping several loans together
- Extending the repayment period
Keep in mind that because you are extending your repayment period, you will probably end up paying more in interest throughout repaying your loans. However, consolidation may also allow you to secure a lower interest rate on your student loans, so it may be worth investigating.
There are several reasons you may want to consolidate and refinance your loans. These reasons could include:
- The monthly payments on your loans are too high but your income is not low enough to qualify you for postponement or deferment
- There are low-interest rates around and you want to get a lower interest rate for your student loans
- You are currently in default on your student loans and you want to qualify for new loans or grants so you can continue your schooling
- Not all of your loans are through a direct loan program from the government and you want to get on an income-contingent repayment plan that your lender does not provide
There are several different lenders offering loan consolidation, including the federal government. Your student loan repayment options will vary depending upon the consolidation lender you select.
Keep in mind that, except for only a few types of loans, you will only be able to consolidate your student loans once.
As tuition has increased and student loans have gotten bigger, it has become more popular to consolidate loans. Because of this, many lenders have aggressively marketed loan consolidation. You should compare the different loan consolidation programs available to you to find the best deal.
What Happens After a Student Loan Default?
When a student loan borrower fails to make a payment, they become "delinquent" the first day they miss the payment.
If you remain delinquent for nine months, the student loan enters default. You may be held liable for collection fees and the commission charged by any debt collection agency involved. The U.S. Department of Education has several collection options available to them, including:
- Seizing your tax refunds (see below)
- Garnishing your wages
- Seizing federal benefits such as Social Security retirement and disability benefits
- Revoking professional licenses
- Bringing lawsuits to collect from assets such as bank accounts, valuable property, and real property
Seizing Tax Refunds for Student Loan Debt
The Department of Education may seize your tax refund to apply it toward defaulted student debt. Though borrowers may appeal, the valid defenses are limited.
You may be able to prevent seizure of your tax refund if the loan:
- Has been repaid
- Is being repaid under a negotiated repayment plan
- Belongs to someone else
- Fits into some other limited circumstances
Alternatively, the Department of Education may seek to garnish your wages. They can garnish up to 15% of your disposable income (this law was temporarily changed due to the COVID-19 pandemic). The defenses to garnishment are very similar to the defenses against the seizure of a tax refund.
Find Out More About Student Loan Relief
Many graduates with student loans may find it difficult the keep up with paying off those loans.
While there are various options to help with paying back student loans, the best way to figure out how to manage student loans is to speak with a local bankruptcy attorney who can advise you of your options based on your specific situation.