What If You Can’t Afford Student Loan Payments?

When student loan payments become difficult to manage, many federal programs and strategies exist to help borrowers navigate financial challenges. Taking proactive steps to address affordability concerns is important to prevent more serious consequences. Understanding the available options can provide a clear path forward for those struggling to meet their repayment obligations.

Income-Driven Repayment Solutions

Federal Income-Driven Repayment (IDR) plans offer a long-term solution by adjusting monthly student loan payments based on a borrower’s income and family size. These plans ensure that payments are affordable, often resulting in lower monthly amounts than standard repayment plans. Payments can even be as low as $0 per month for some individuals.

Several IDR plans are available, including the Saving on a Valuable Education (SAVE) Plan (formerly REPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Each plan calculates payments differently, primarily based on a percentage of your discretionary income. For instance, the SAVE Plan generally uses 225% of the poverty guideline to determine discretionary income, while PAYE and IBR typically use 150%, and ICR uses 100%. This means more of your income is protected on the SAVE plan, potentially leading to lower monthly payments.

Monthly payment percentages also vary across plans. For undergraduate loans, SAVE will reduce payments to 5% of discretionary income starting in July 2024, while PAYE and newer IBR plans typically set payments at 10% of discretionary income. Older IBR plans might require 15% of discretionary income, and ICR can be up to 20%. These calculations rely on your Adjusted Gross Income (AGI), which is often lower than your gross income due to various deductions, potentially resulting in a lower monthly payment.

Eligibility for these plans depends on your loan type and financial situation, with most federal Direct Loans and some Federal Family Education Loan (FFEL) Program loans qualifying. Certain older federal loans or Parent PLUS Loans may require consolidation into a Direct Consolidation Loan to become eligible for IDR plans. Borrowers must annually recertify their income and family size to remain on an IDR plan, as payments are recalculated each year.

A notable benefit of IDR plans is the potential for loan forgiveness of any remaining balance after a specified repayment period, typically 20 or 25 years, depending on the plan and loan type. Forgiveness on the SAVE plan can occur after as few as 10 years for borrowers with original principal balances of $12,000 or less, with additional time added for higher balances. While loan forgiveness can provide significant relief, the forgiven amount may be considered taxable income by the IRS at the time of forgiveness.

To apply for an IDR plan, borrowers generally need to gather their most recent tax return or other proof of income, such as pay stubs, and information about their family size. An FSA ID is also necessary to access the federal student aid website, which streamlines the application process. Providing consent to securely access federal tax information can simplify annual recertification.

Temporary Payment Relief Options

When facing short-term financial hardship, federal student loan deferment and forbearance options can provide temporary relief from payments. These options allow you to pause or reduce your monthly payments, but they differ significantly in how interest accrues. Understanding these distinctions is important for making an informed decision.

Deferment allows for a temporary pause in payments, and interest generally does not accrue on subsidized federal loans during this period. Common types of deferment include:
In-school deferment for those enrolled at least half-time.
Unemployment deferment for those seeking work or unable to find full-time employment.
Economic hardship deferment.
Other deferments for graduate fellowship programs, cancer treatment, military service, and rehabilitation training programs.
Eligibility typically requires specific documentation.

Forbearance also provides a temporary suspension or reduction of payments, but interest accrues on all loan types during this period. This means your loan balance can increase even while you are not making payments. General forbearance may be granted by your loan servicer if you are experiencing financial difficulties, medical expenses, or changes in employment. Mandatory forbearance is required in specific situations, such as:
Serving in AmeriCorps.
Participating in a medical residency.
Having student loan payments that exceed 20% of your gross income.

Both deferment and forbearance are temporary and are not intended as long-term solutions for managing student loan debt. While they can prevent default during periods of financial strain, the accruing interest, especially with forbearance, can increase the total amount repaid over the life of the loan. It is generally advisable to explore income-driven repayment plans if you anticipate a prolonged period of difficulty in making payments.

Understanding Loan Default

Failing to make scheduled student loan payments can lead to serious consequences, particularly for federal student loans. For most federal student loans, default typically occurs after 270 days of non-payment. Once a loan enters default, the entire unpaid balance and any accrued interest become immediately due, a process known as acceleration.

The repercussions of default can significantly impact a borrower’s financial standing. A default is reported to national credit bureaus, causing substantial damage to your credit score. This credit damage can hinder your ability to secure future loans, such as mortgages or car loans, and may lead to higher interest rates or difficulty obtaining credit cards.

Beyond credit score damage, the federal government has tools to recover defaulted student loan debt. Your tax refunds and federal benefit payments, including Social Security benefits, may be withheld and applied toward your defaulted loan through a process called Treasury offset. The government can also garnish your wages, allowing up to 15% of your disposable pay to be withheld by your employer without a court order.

Defaulting also leads to the loss of eligibility for future federal student aid, including grants and additional loans. Borrowers in default lose access to beneficial repayment options like deferment, forbearance, and income-driven repayment plans. Collection costs, attorney’s fees, and court costs may be added to the loan balance, further increasing the amount owed. Avoiding default is important, as solutions exist to prevent this financial state.

Steps to Secure Payment Relief

Once you have identified the appropriate payment relief option, the important action is to contact your loan servicer directly. Your loan servicer is the entity that handles your student loan billing and other services, and their contact information can typically be found on your studentaid.gov dashboard.

After contacting your servicer, you will need to obtain the official application forms for the specific relief option you are pursuing. These forms are usually available on your loan servicer’s website or through the studentaid.gov portal for federal programs like Income-Driven Repayment plans. Carefully fill out the required information, ensuring accuracy to avoid delays in processing your request.

Submitting your application can often be done through various methods, including online portals, mail, or fax, depending on your servicer’s capabilities. It is advisable to keep copies of all submitted documents and correspondence for your records. Following submission, actively track the status of your application with your loan servicer to confirm receipt and monitor its progress.

For those on Income-Driven Repayment plans, annual recertification of income and family size is a mandatory ongoing requirement. Failure to recertify can lead to your monthly payments reverting to a higher amount or your loan being placed on a standard repayment plan. If your application for relief is denied, you typically have the right to appeal the decision by providing additional information or clarification to your loan servicer.