Repaying federal student loans may seem impossible. Maybe you don’t have a job, or perhaps the bill seems far too high. Overwhelmed borrowers often make the mistake of ignoring their student loans and fall into delinquency or default.
Unemployment or underemployment does not have to get in the way of repayment of federal student loans, regardless of the size of the loan balance. Income-driven repayment plans mean that nearly all federal borrowers should be able to avoid delinquencies and defaults.
Recent data from the Department of Education shows that the default rate is on the decline, but with over 1 in 10 borrowers defaulting on their loans, the default rate is much higher than necessary.
What if I can’t afford my student loan bill?
One of the mistakes many borrowers make is that they assume they have to pay the amount due on their monthly student loan bill. This is a reasonable assumption. Typically, when any statement comes in the mail, that is the amount you owe, and there is little room for negotiation.
Federal student loans are much different. For most borrowers, the monthly bill is calculated to pay off your student loans in ten years. This is called the standard repayment plan. The standard repayment plan is also the most expensive option.
The federal government has several repayment plans in place that allow borrowers to pay what they can afford rather than what they owe. These income-driven repayment plans can often result in monthly payments of $0. Borrowers are expected to pay as little as 10% of their discretionary income towards their student loans. Best of all, if you make payments under an income-driven repayment plan for 20 to 25 years, any remaining student loan balance can be forgiven. If you work for the government or a non-profit, the balance can potentially be wiped away after ten years of payments.
I don’t even know who to pay
Loans transferring between federal student loan servicers can make things difficult. Fortunately, there is a fairly easy way to track down the people responsible for collecting your student loan bills. (These are also the companies tasked with answering your student loan questions and helping you manage your balance.)
If you don’t know who you should be talking to or who you should be paying, visit the Department of Education’s Federal Student Loan Database. In this database, you will be able to learn the type of loans you have, the balance, interest rate, and loan servicer contact information.
What if my loan servicer won’t work with me?
The quality of federal student loan servicing can be pretty low. Their customer service representatives are underpaid and poorly trained to help people navigate their federal loans. Unfortunately, you are stuck working with them.
However, there are a couple of tricks that you can use to make sure things go as smoothly as possible. First, do your homework before calling. Research the plan you want and investigate the questions that you have. Second, if you are not getting the help you want from the person you are talking to, call back again later. Within each federal loan servicer office, there are good people, and there are bad people. If you get the chance to talk to someone very helpful, try to get their information so that you can directly contact them next time you have an issue or question.
One helpful tool from the Department of Education is the Federal Student Loan Repayment Estimator. This tool gives borrowers an estimation of their monthly payments on all of the various federal repayment plans. This resource can provide a starting point for discussions with loan servicers.
What if my loans are already delinquent or in default?
Fixing a delinquent loan can normally be addressed by calling your loan servicer. If you are behind and cannot afford payments, they will help you get things fixed so that you can make payments based upon your income rather than what you owe.
Fixing a loan in default can take a bit more work. Loans can get out of a default status through consolidation or rehabilitation. The National Consumer Law Center has a nice summary of the two routes to getting loans out of default. The Department of Education also has some detailed information on the process of getting out of default.
Is being in default a big deal?
Being in default causes many different issues. In your daily life, you can be constantly annoyed with collection phone calls. Your finances will take a beating because being in default will destroy your credit score. Your loan balance will grow quickly due to late fees and interest, making your situation worse with each passing day.
Because the loans are owned by the federal government and not a private company, there are also many powers that the government has to collect your debt. The National Consumer Law Center has a nice explanation of the things the government can do to collect your student debt.
Being in default sucks. However, even if you have no income, there are ways to keep your debt current and under control.