What To Do When You Can’t Repay Your Student Loans

For many recent grads, student loan debt is an overwhelming burden. In fact, about 7 million borrowers have gone at least a year without making a payment—which means about 17 percent of debtors are delinquent. 

If you can’t afford to pay back your student loan, it may seem like your hands are tied, but the last thing you want to do is ignore your debt. Unlike most other debts, student loans aren’t typically dischargeable in bankruptcy. In other words, you’re likely stuck with them. However, there is some relief, and David Carlson, personal finance expert and author of Hustle Away Debt, breaks it down for us.

WHAT HAPPENS WHEN YOU STOP PAYING YOUR LOAN?

When you're late on your debt payments, you can expect your credit score to plummet. And poor credit leads to all sorts of other money hassles: You might find it difficult to buy a house, get a car, or rent an apartment. If that’s not enough, some bill providers are even allowed to charge an extra fee to customers with low credit scores.

“You do not want to fall behind on your student loans because it’s the first step on a path to defaulting on your student loans,” Carlson says. “A default on your student loans," which happens once your payment is 270 days late, "will stay on your credit history for seven years.” 

You want to avoid going into default at all costs, because there are so many negative consequences. For example:

- If it’s a federal loan, you’re no longer eligible for student loan forgiveness programs.
- Your wages can be garnished.
- Your tax refund can be garnished.
- If the loan is sent to collections, you may owe additional fees.

Before looking into relief options, which all have potential drawbacks, Carlson says borrowers should first look for ways to earn extra cash. “My suggestion is to first look to increase your income at your 9-5 job,” Carlson says. “If you have maxed out your compensation at your 9-5 it’s time to look into side hustles," like a freelance gig or part-time job. "My wife and I were able to offset our $1000+ monthly student loan payments through taking part in side hustles.” 

Beyond that, here are a few options for relief.

1. INCOME BASED REPAYMENT

If you don’t earn much and you have a federal student loan, you might consider an income-driven repayment plan, which lowers your monthly loan payment based on your income. “There are four different options with this but they all follow the general principle that you will only be required to contribute a certain percentage of your discretionary spending towards your loan,” Carlson says. 

Here's the Department of Education's summary of each option:

The eligibility requirements and repayment criteria vary between each plan, but you can check out the details, including instructions on how to apply, via this IBR fact sheet (PDF).

Also, with an income-driven repayment plan, some of your interest and loan balance may be forgiven—but keep in mind, you’re generally required to pay any taxes on this forgiven amount. 

2. CHANGING YOUR PAYMENT PLAN

“Yet another option is changing your payment plan,” Carlson says. “Many people stick to the default Standard Repayment Plan when they graduate. This plan has fixed payment amounts and [payments] typically occur over the course of 10 years. Two ways to lower your payments today would be to switch to the Graduated Repayment Plan that starts with a lower payment amount that gradually increases over time.”

Similarly, an Extended Repayment Plan changes your repayment period from 10 to 25 years. Payments can be fixed or gradual. Of course, the longer it takes you to pay off your loan, the more you’ll pay in interest. But if you’re truly struggling, it's a better option than risking default. 

If income based repayment isn’t an option (maybe you have a private loan, which understandably isn't eligible for federal loan programs), you can always try calling your lender to work out a new plan with new terms. Again, the longer you take to pay off the loan, the more you’ll pay in interest.

3. DEFERMENT AND FORBEARANCE

Many lenders also offer deferment and forbearance. With deferment, you can stop paying your loan's principal and interest for a while, essentially postponing your repayment to a later date. Best of all, interest won’t accrue during that “no pay” period. Forbearance works pretty much the same way, minus the interest benefit. Your interest will continue to accrue while you’re not paying your loan.

“There are a variety of situations where you are able to enter deferment, including being enrolled at least part-time as a student or during a period of unemployment or inability to find full-time employment,” Carlson says.

The Department of Education has full details on both options at their Federal Student Aid website. If you have a private loan, again, you’ll have to talk to your lender to see if they offer either option.

BEWARE CONSOLIDATION

With a loan consolidation, your student loans are refinanced into a new loan. This means you’ll have a new repayment schedule, and your interest rate may change, too. If you’ve gone into default, consolidation can take you out of it. However, it’s not an ideal move. 

Carlson warns that, when you consolidate a federal student loan, you lose some of the aforementioned relief options. And like many of the other options, you end up stretching out the life of your loan, which means you’ll pay more in interest over time. “You may hear a lot of people who suggest consolidating student loans, but think twice before going down that road,” Carlson says. “Look into some of the other options before falling behind and even consider working directly with your lender to put together a plan that works for both of you.” 

“Keep in mind that most of these options are short-term solutions,” Carlson says. “Don’t get me wrong, student loans can be a huge burden to deal with. Sometimes you have to focus on getting by in the short-term, and there’s nothing wrong with that.  Eventually you will have to pay back your student loans so it’s best to eventually focus on attacking the problem.”