Can’t pay your student loan? Understand your options

Student Loan Payment Delay

It is not unusual for people to face periodic financial hardships.  Most recently, the Coronavirus has had a large impact on businesses and household incomes; as a result, many borrowers have struggled to make their student loan payments. This is a stressful situation for many,  but there may be options available to you to help reduce or defer payments during periods of hardships.  

Options for modifying loan payments vary greatly depending if the loan is a Federal Student Loan, one guaranteed by the US Department of Education, or if it is a Private Student Loan, directly issued by a bank or other Financial Institution, with no Government guarantee.  As such, we will divide this guide in these two categories:

PAYMENT RELIEF FOR PRIVATE STUDENT LOANS

Many students and parents of students take Private Student Loans to pay for college, often because they did not qualify for Federal Student Loans, or to supplement the amount received under a Federal Student Loan. Private lenders typically do not offer the generous loan forgiveness and deferment options available on Federal Student loans, however, most offer some form of Hardship relief, particularly in light of current economic conditions.  

Lender Payment Relief Plans:

Every bank will have different policies regarding deferments and forbearance. As an example: 

Sallie Mae. They have a “COVID-19 forbearance”, a three-month suspension of your student loan payments. With this program, interest still accrues but it is not capitalized. 

Wells Fargo. They provide relief for up-to 3 billing cycles if your economy was affected by coronavirus. 

Discover. The Skip-A-Pay program gives you a two-month forbearance that could be extended. Keep in mind that interest will still be charged during this period. 

SoFi. They allow you to skip payments for 60 days with an optional 30-day extension. Just remember that this option will extend the life of your loan and cause it to accrue more interest.

Some private lenders, such as Sallie Mae, SoFi, CommonBond, and Discover also let you defer payments if you return to college, enter graduate school, or take an internship, or residency.

If you need to temporarily stop or reduce your student loan payments, contact your student loan servicer, to see what options they may offer.

State Mandated Hardship Relief  

Many states have developed initiatives to help private loan borrowers in times of hardship. The programs might not be as convenient as those available through the CARES Act, but worth requesting in times of hardship.  Relief they can provide may include:

– Forbearance for a minimum of 90 days.
– Exemption of late payment fees.
– The omission of negative credit reports.
– Protection from debt collection activities. 

States with such programs include: California, Colorado, Connecticut, District of Columbia, Illinois, Massachusetts, New Jersey, New York, Vermont, Virginia, and Washington. You might be eligible for payment relief if you borrowed the money from one of these companies:

You should contact and work directly with your student loan servicer to learn about and apply for available relief.

PAYMENT RELIEF FOR FEDERAL STUDENT LOANS

One of the big advantages of Federal Student Loans, is that they offer many options for loan deferment, forbearance, and in some cases, forgiveness.  We will review these here.

Student Loan Relief due to Coronavirus under CARES Act

 If you received a federal student loan owned by the U.S. Department of Education (ED), you are automatically allowed to stop paying from March 13, 2020, until January 31st, 2021. Receiving this benefit also means that your interest rate drops to 0%.
Since it is an automatic process, you don’t need to contact your lender to ask for it. It should appear instantly in your loan balance.  If you still want to pay a portion of your monthly fees, you can do that as well.

Ongoing Federal Student Loan Relief Programs

Beyond short-term payment relief introduced recently under the CARES Act, there are several ongoing options.

FEDERAL STUDENT LOAN DEFERMENT

This type of program allows you to stop making your loan monthly payments. The government would cover the interest if it were a subsidized loan. If your loan is unsubsidized or a PLUS loan, interest continues to accrue, and it is added to your loan balance at the end of the deferment period. 

Are you eligible? Below are circumstances that could qualify you for a deferment if you have a federal student loan:

Economic Hardship

You could apply for this benefit up to three years, if you:

  • Receive a benefit similar to welfare
  • Work full-time but your salary is below 150% of the poverty guideline for your family size or state of residence;
  • Serve in the Peace Corps

To apply, complete the ECONOMIC HARDSHIP DEFERMENT REQUEST.

Parent PLUS Borrower 

If you are a parent who received a Direct PLUS Loan, and your child is enrolled at least half-time at an eligible college or career school, then you may qualify for this deferment. It would still be available up to six months after your child was enrolled at that institution.
To apply, complete the PARENT PLUS BORROWER DEFERMENT REQUEST.

Unemployment 

If you are trying to find a full-time job and not succeeding, or if you are already receiving unemployment benefits, you may be eligible for this deferment. Working full-time means that you are working at least 30 hours per week for at least three consecutive months. 
To applycomplete the UNEMPLOYMENT DEFERMENT REQUEST.  

Graduate Fellowship Deferment

If you are enrolled in an approved graduate fellowship program, you could request a deferment.  
To apply, complete the GRADUATE FELLOWSHIP DEFERMENT REQUEST.

Cancer Treatment 

You could apply for deferment if you are undergoing cancer treatment. 
To apply, complete the CANCER TREATMENT DEFERMENT REQUEST.

Rehabilitation Training 

If you are currently enrolled in an approved rehabilitation program for drug or alcohol abuse or other mental health conditions, you could request a deferment.
To apply, complete the  REHABILITATION TRAINING DEFERMENT REQUEST

Military Service and Post-Active Duty Student Deferment

You can apply for postponement of your payments if you are enrolled in college, or within six months of leaving school when called into military service, and after you completed such service (and up to 13 months after).
To apply, complete the MILITARY SERVICE AND POST-ACTIVE DUTY STUDENT DEFERMENT REQUEST.

FEDERAL STUDENT LOAN FORBEARANCE

If you don’t qualify for deferment, you may qualify for forbearance. With forbearance, you would still pay the interest on the loan, but not the principle. Therefore, your payments will be reduced. However, you will not be making progress towards paying off your loan. So you are extending the time to pay-off your student loan. 

There are two types of forbearances:

General Forbearance

If you continue to experience difficulties paying your student loan after September 30, 2020, you can apply for this type of forbearance. Your reasons may be:

  • Financial difficulties
  • Medical expenses
  • A change in employment status

These apply to Direct Loans, Federal Family Education (FFEL) Program loans, and Perkins Loans. 
Fill out the GENERAL FORBEARANCE REQUEST.

Mandatory Forbearance

The circumstances under these forbearances are given are many. They occur when your loan servicer is required to grant forbearance for at least a year.
The eligibility requirements and the conditions of the forbearance depend on the type of loan you have. For instance:

Perkins loans.

If your monthly payment is 20% or more of your monthly gross income, you could be eligible for a three-year forbearance.

Direct or FFEL loans.

You could qualify for this forbearance if you: 

  • Assign 20% or more of your monthly gross income to your monthly loan payments.
  • Participate in a medical or dental internship or residency program.
  • Are an active educator who could qualify for teacher loan forgiveness.
  • Can receive partial repayment under the Department of Defense’s Student Loan Repayment Program.
  • Are an active member of the National Guard but are not eligible for a military deferment.

You can ask for this type of relief through this MANDATORY FORBEARANCE REQUEST

INCOME-DRIVEN REPAYMENT PLAN

Paying off your loans under this program could be helpful if your income is low compared to your loan monthly payments. It takes into account your monthly income and family size to calculate your monthly student loan payment and works with almost all federal loans. There are four plans you could apply for:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

On each plan, the percentage of your income that you pay into your loan could range from10% to 20%. Its duration could also vary between 20 and 25 years to fully repay it. 

All four plans grant that any remaining loan balance would be forgiven if your federal student loans weren’t fully repaid when the repayment period ends. Also, if you asked for a deferment or forbearance, those months or years aren’t discarded but taken into account in your total repayment period.  
Complete here the INCOME-DRIVEN REPAYMENT (IDR) PLAN REQUEST

PUBLIC SERVICE LOAN FORGIVENESS (PSLF): 

Under certain circumstances, the remaining balance on your loan could be forgiven. Do you qualify for this? You do, if:

  • A U.S. federal state, local or tribal government, or not-for-profit organization employs you full-time.
  • You have Direct Loans (or consolidate other federal student loans that you already have into a Direct Loan).
  • You are repaying your loans under an income-driven repayment plan.
  • You make 120 qualifying payments.

Complete the PUBLIC SERVICE LOAN FORGIVENESS form to apply.

To conclude

If you are having difficulties making your monthly student loan payment, in most cases you can get some relief in the form of a deferment, forbearance, or other payment modification.  You should always contact and work with your loan servicer to understand your options, ideally before missing a payment.  In this way, you may find a solution which will not impact your credit score.

For more details and updates on Federal Student Loans, visit theFederalStudentAid website.

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