How to Manage Your Student Loans When Facing a Financial Hardship

“These payments are higher than my rent.”

“I’m going to have to live on ramen and peanut butter to afford my student loan payments.”

“I’ll never get out of debt.”

If any of these phrases sound familiar to you, you’re not alone. Millions of college graduates struggle to manage their student loans each year. But when a financial difficulty comes your way — such as losing your job or facing a medical emergency — keeping up with your student loan payments can become downright impossible.

Before deciding to skip your student loan payments and wrecking your credit, it’s important to know that there are solutions available to you to help make your debt more manageable while you get back on your feet.

Short-term hardships

Short-term hardships are financial difficulties that are limited in their duration. Examples include when you’re on medical or maternity leave or you just lost your job. In these cases, you need some help right now, but once the issue is resolved, you’ll be able to make your payments again. If that’s what you’re dealing with right now, you have two potential solutions.

1. Deferment and forbearance

In certain situations, you can enter your loans into deferment or forbearance. That means you can temporarily postpone making payments on your loans without becoming delinquent on your loans.

With a deferment or forbearance, you can postpone making payments on federal student loans for up to 12 months at a time and up to 36 months in total duration. On private student loans, forbearances are typically limited to 12 months in total duration. Interest will continue to accrue on your loans, causing the balance to grow, but this approach can give you some time to fix the root cause of your problem.

To request a deferment or forbearance, contact your loan servicer directly.

2. Partial forbearance

If you’re ineligible for a regular forbearance, you may be eligible for some form of relief known as partial forbearance. Under this approach, the lender allows you to temporarily make interest-only payments on your loans, lowering your monthly bill. Partial forbearance is offered by some lenders of private student loans. You can ask for a partial forbearance by speaking with your loan servicer.

Long-term hardships

But, what if you have a long-term financial hardship? You’ve got a job, but you can’t find work that pays enough money for you to afford basic living expenses and your student loans. Or, a family member may need long-term medical care, stretching your finances thin. If that’s the case, there are two long-term solutions.

1. Income-driven repayment plans

Income-driven repayment plans are available for federal student loans. With an income-driven repayment plan, your monthly payment is based on a percentage of your discretionary income (10%, 15% or 20%), as opposed to the amount you owe. That change can lead to a significantly lower bill. Some people even qualify for a payment as low as $0.

The four income-driven repayment plans are income-contingent repayment (ICR), income-based repayment (IBR), pay-as-you-earn repayment (PAYE) and revised pay-as-you-earn repayment (REPAYE). The differences are shown in this table.

If you have Parent PLUS Loans, you’re not eligible for an income-driven repayment plan as is. However, there is a loophole. You can become eligible for income-contingent repayment — one of the four income-driven repayment plans — if you first consolidate your loans with a Direct Consolidation Loan.

A fifth repayment plan based on income, income-sensitive repayment, is available only in the FFEL program. The monthly payment is based on a percentage of income between 4% and 25% and must exceed the new interest that accrues. Details are determined by each FFELP lender.

With an income-driven repayment plan, you’ll pay more in interest than you would with a Standard Repayment Plan. However, the tradeoff may be worth it to get more manageable payments.

2. Other repayment plans

If you have federal student loans, you’re immediately enrolled in a Standard Repayment Plan, which means your payments are spread out over the course of ten years. Your payments are fixed, meaning they stay the same for the length of your loan.

If your payments are too high, consider switching to a different repayment plan:

• Graduated Repayment Plan: With a Graduated Repayment Plan, your payments start off low, barely above interest-only payments, and increase every two years.
• Extended Repayment Plan: Under an Extended Repayment Plan, your loan repayment term can be longer that the standard 10 years, depending on the amount of debt. Payments are fixed, just like the payments under standard repayment, but smaller than the payments under standard repayment.

The repayment term with both graduated repayment and extended repayment can be as long as 30 years, depending on the amount owed. If the borrower does not consolidate their loans, the repayment term is 25 years if they have at least $30,000 in federal student loan debt. If the borrower consolidates his or her federal student loans, the repayment term is 20 years for $20,000 to $39,999, 25 years for $40,000 to $59,999 and 30 years for $60,000 or more.

With these plans, you may pay more in interest than you would with a Standard Repayment Plan. However, they can help prevent you from missing payments, making them worthwhile solutions.

Tackling your debt

While these solutions offer some relief in the case of financial hardship, they have drawbacks. With all of them, you will likely end up paying more in interest. Deferments and forbearances can cause your loan balances to grow, as can negatively amortized income-driven repayment plans. You could end up owing far more than you originally borrowed, making it difficult to dig yourself out of the hole.

These solutions can help you get back on your feet, but then you need to come up with a plan to aggressively tackle your debt.

Create a budget: First, make a detailed budget that outlines your income and your expenses. Increasing awareness of your spending will help you exercise restraint. Then, look for any expenses that you can cut, such as eating out or monthly subscriptions.

Make lifestyle changes: If you can’t afford your loan payments and basic essentials, you may need to make more drastic changes to pay off your debt. Consider downsizing to a smaller apartment, getting a roommate, moving back home with your parents or ditching your car to take advantage of public transportation, if possible.

Increase your income: There are only so many ways to cut back on your expenses, so it’s important to look for opportunities to increase your income, as well. That might mean asking for a long overdue raise, searching for a better-paying job, or taking on a side hustle on nights and weekends to boost your earnings.

If you’re facing financial difficulties and are struggling to afford your loans, it’s important to know that there are options that can provide you with some financial relief. By taking advantage of those options, and making lifestyle changes, you can better afford your student loan payments.