Student Loan Help: Free and Low-Cost Solutions to Out-of-Control Loans

Why is getting student loan help quickly so important? It’s not just the worried feeling in the pit of your stomach when you’re falling behind on your loan payments—or seeing a near-future date when you will. Miss enough payments and you could face serious consequences. Along with damage to your credit score, you could have your wages garnished, be sued, or have your tax refund seized. Fortunately, both federal and private loan servicers have ways to help borrowers get back on track. Nonprofit organizations can provide assistance, too. And if those options don’t work, hiring a knowledgeable attorney could be money well spent. Here’s how to get help when you’re struggling with student loans.

Income-Driven Repayment

If you can’t afford your monthly student loan payments now, but a lower payment might be doable, you have several options.

If you have federal student loans, consider applying for an income-driven repayment (IDR) plan. That can be a good choice if your income is low relative to your student loan debt.

Your payment under an IDR plan could be as low as $0. Each year, you will need to recertify your income with the federal government, and your monthly payment will be adjusted based on your income and family size. There are four different IDR plans; the ones available to you will depend on the type of federal student loans you have.

When you choose an IDR plan, you will probably pay more interest in the long run because you’ll owe money for a longer period and be paying down principal more slowly than if you were on a standard 10-year repayment plan. IDR plans forgive your remaining balance after 20 or 25 years of payments, but you may owe federal income tax on the forgiven sum. It’s a good idea to set aside a little money each year so you’ll be able to pay that bill one day.

Income-driven repayment won’t solve everyone’s student loan problems. Some borrowers find that because the monthly payment is based on gross income and they have so many mandatory expenses, such as taxes and child support, they still can’t afford the payments. And if your loans are in default, you aren’t eligible for IDR (or for deferment or forbearance, for that matter). You’ll first need to fix the default through loan rehabilitation or consolidation, as we explain later.

Deferment and Forbearance

Deferment and forbearance are two ways to temporarily stop making payments or lower your payments on your federal student loans. Some private lenders offer one or both of these options, but with different rules.

Borrowers with subsidized federal loans or federal Perkins loans don’t have to pay the interest that accrues during deferment. Forbearance, on the other hand, does not stop interest from accruing on any type of federal student loan. Private lenders can decide for themselves how to handle interest accrual under deferment or forbearance.

Your lender or loan servicer will require you to meet certain conditions before it approves your request for deferment or forbearance. Federal student loan borrowers, for example, may be able to take a break from making payments if they are unemployed, experiencing economic hardship, undergoing or recovering from cancer treatment, or serving on active military duty.

Delinquency and Default

Either deferment or forbearance may be better than letting your loans become delinquent (overdue). Once you are 90 days delinquent, your loan servicer will report your overdue payments to the three major credit bureaus, which may hurt your credit score and make it harder to get other forms of credit—or do anything else that requires you to pass a credit check, such as renting an apartment or landing certain jobs.

Going into default is even worse. Time to default varies by loan type, but for federal Direct Loans and Federal Family Education Loans, it’s 270 days (about nine months). For private student loans, default usually happens as soon as you miss a payment. Default and its consequences will be defined in your loan agreement. If you go into default on a student loan, your entire balance can become due immediately, your lender can sue you, and your wages can be garnished, among other serious consequences.

When Your Federal Student Loans Are in Default

If your federal student loans are in default, you can enter the federal student loan rehabilitation program or you can use loan consolidation.

Loan rehabilitation

The federal student loan rehabilitation program requires you to make nine payments within 10 consecutive months. You’ll need to work with your loan servicer to determine your required payment, which will be based on your disposable income.

You’ll also need to provide proof of your income and possibly proof of your expenses. The Federal Student Aid website says your payments could be as low as $5 per month under a rehabilitation plan.

Once your loan is rehabilitated, you can apply for deferment, forbearance, or income-driven repayment. Your credit report will no longer show a default, though it will still show the late payments that led to your default. You only get one chance to rehabilitate a loan. In addition, your loan will continue to accrue interest during rehabilitation, and you may have to pay collection fees, as well.

Loan consolidation

Loan consolidation is another option for getting out of default. You may be able to use a federal Direct Consolidation Loan to pay off your defaulted loan. You can then set up an income-driven repayment plan on your new consolidation loan if you wish.

You’ll need to make three consecutive monthly payments on your defaulted loan before you can consolidate it. Your loan servicer will base the amount of these payments on your current financial circumstances, so they may be less than you were required to pay in the past. Consolidation will get you out of default sooner, but it won’t remove the default from your credit report. It also comes with possible collection fees and additional accrued interest.

When Your Private Student Loans Are in Default

There’s no simple path for getting out of default when it comes to private student loans. You’ll have to work out something with your lender or hire an attorney. Negotiating a settlement for less than you owe may be an option.

To find an attorney, try the website of the American Bar Association, the National Association of Consumer Advocates, or LawHelp.org. If you can’t afford to have an attorney represent you, consider paying for an hour or two of their advice so you can learn what you need to do to represent yourself. You can expect to pay a few hundred dollars for this service versus several thousand to have an attorney represent you. And be careful to avoid student loan scams when you’re looking for help.

Student Loan Refinancing

If you have multiple federal student loans, you can apply for a consolidation loan, as noted above. Its interest rate will be based on your loans’ original interest rates. Unfortunately, you can’t consolidate your loans into a new loan with a lower interest rate, even if rates are lower now. To get that lower rate, you’d need to refinance your federal student loans into a private student loan. You can also refinance private student loans into a new private student loan.

It can make sense to refinance if doing so will significantly lower your interest rate and make your monthly payment more affordable. It can also help you repay your loan faster and pay less interest over the life of the loan.

However, if you refinance a federal loan into a private loan, you will lose the unique benefits of federal loans: income-driven repayment, loan forgiveness, loan rehabilitation, and possibly deferment and forbearance. So think carefully before giving up these benefits.

Refinancing might also mean paying an origination fee, depending on the lender. Many private student lenders don’t charge them, but if they do, the fee will usually be added to your loan balance or subtracted from your loan proceeds.

Private student refinance loans can have fixed or variable interest rates. If you’re struggling with your current payments, it may be tempting to refinance into a variable-rate loan because it will probably have a lower interest rate than a fixed-rate one. Before you do, find out how often the loan’s rate can increase and by how much. Also find out what the floor and ceiling are on the variable interest rate. You’ll need to consider whether you would be able to afford the payments if the rate goes up.

You’ll have to have good credit to refinance and get a favorable interest rate. If you’ve already fallen far behind and your credit score has plunged, refinancing might not be an option for you. You also need to have a steady income to refinance, so if you’re unemployed, you’ll have to look at other options.

If Student Loans Are Part of a Bigger Financial Problem

A nonprofit credit counseling organization can work with you to come up with a personalized plan to repay your student loans and any other debts. You may have to pay a fee for this help. A reputable place to search for help is the National Foundation for Credit Counseling. A credit counselor can offer guidance on your entire financial picture, not just with getting your student loans under control.

The Bottom Line

Ignoring financial problems never makes them go away, and that’s especially true with federal student loans. The government has the power to seize your income tax refund and garnish your wages and even Social Security benefits.

Falling too far behind on any type of student loan, federal or private, can seriously hurt your credit. It can also cause your lender to take the seemingly nonsensical and drastic step of accelerating your loan, making the entire balance due immediately.

You can prevent the situation from getting worse and put your loans back on track with one of the options described above. If your situation is basically hopeless, trying to get your student loans discharged in bankruptcy—sometimes possible, but not easy— might be your best option.