If you can’t afford the monthly payments for your student loans, you’re not alone.
U.S. Secretary of Education has called the rising student loan debt issue a “crisis,” student loan borrowers are delaying buying a home, and a recent study estimated that 40% of borrowers could default on their student loans by 2023.
Not a rosy picture.
So, what do you do if you can’t afford your monthly payments?
Here’s how to structure your approach for student loan repayment:
1. Separate your federal student loans and private student loans
Too many people lump their student loans together and say they owe “$50,000 of student loans.” While that may be true, federal student loans and private student loans are different.
When you borrow federal student loans, your lender is the federal government. When you borrow private student loans, your lender typically is a bank or other financial lender. This may sound like Student Loans 101, but it’s an important distinction because it can impact how you repay your student loans.
Categorize the respective amounts you owe so you can attack them differently.
2. Check your Master Promissory Note
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Your federal student loans and private student loans are each governed by a separate Master Promissory Note. This is the key document that summarizes the terms and conditions of your student loans – and is particularly important for private student loans.
If you don’t have a copy, ask your lender so you can understand your options. Why is this important?
Federal student loans come with certain borrower protections such as forbearance and deferral. Private lenders may offer a form of forbearance or deferral as well, but it’s critical to check with your lender to determine what options your lender offers.
Therefore, with federal student loans, all borrowers generally have the same financial protections. With private student loans, each lender sets its own terms and conditions. For example, your financial terms and conditions for your private student loans may be different than your friend’s.
3. Speak with your lender about options
Once you have reviewed your Master Promissory Note, contact your lender regarding your options.
If you are struggling to make payments on your private student loans, the last thing you or your lender wants is for you to default.
Lenders don’t like defaults; they like to get paid.
That’s why it’s worth contacting your lender to determine if they will work with you. Your lender may let you pause your payments, but it may be your best move (even if your lender charges interest).
Explore your options – you may be surprised how flexible some lenders can be. Of course, evaluate the financial impact of agreeing to any financial repayment plan with your lender.
4. Evaluate federal student loan repayment options
Now, let’s move to federal student loans.
If you are struggling to repay federal student loans, make sure you understand income-driven repayment plans.
Income-driven repayment plans help reduce your monthly payment on your federal student loans. There are four income-driven repayment plans:
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
REPAYE: Monthly payments are equal to 10% of discretionary income. The monthly payment amount is based on adjusted gross income, family size and total eligible federal student loan balance.
PAYE: Monthly payments are equal to 10% of discretionary income. The monthly payment amount is based on adjusted gross income, family size and total eligible federal student loan balance. Direct Loans only. You must be a new borrower as of Oct. 1, 2007, and your Direct Loan must have been disbursed on or after Oct. 1, 2011
IBR: Monthly payments are equal to 15% (10% if you are a new borrower) of your discretionary income. Both Direct Loans and FFEL Loans are eligible.
ICR: Monthly payments are the lesser of (1) what you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income or (2) 20% of your discretionary income. If you have a PLUS Loan (including Parent PLUS Loans), you can consolidate with a Direct Consolidation Loan and then you select ICR to repay the Direct Consolidation Loan.
Remember, with federal student loan repayment plans, although your monthly payment is lower, interest is still accruing.
5. Make a student loan game plan
It’s easy to feel overwhelmed when looking at your student loan balance.
Once you evaluate all your options, it’s time to make a student loan repayment plan.
This is your specific strategy to crush student loan debt, including plans for both your federal and private student loans.
Your student loan plan can include income-driven repayment plans, student loan consolidation and student loan refinancing.
When you stay organized and tackle your student loan debt methodically, you may be able to lower your monthly payment and get back on track with your student loans.