It’s not uncommon for college graduates to walk across the stage not knowing what awaits them on the other side. The current economic crisis has created an extremely competitive job market, leaving recent college graduates with limited options.
Unfortunately, loan providers do not always have a soft spot in their heart for grads who are going through a rough patch. According to the College Board, 14% of borrowers have at least one delinquent loan, which amounts to a whopping $85 billion.
If your student loan debt is no longer eligible for deferment and you do not have the means to remit timely payments, here are a few suggestions:
Notify Your Lender
If you have not already done so, notify your lender immediately. They will be able to educate you on your options and possibly make payment arrangements that are feasible for your current financial situation. Ignoring calls about outstanding student loan debt will only exacerbate the problem and force the lender to take adverse action against you.
Request an Extended Loan Term
Amortizing the amount of the loan over a longer period of time will lower the monthly payments. However, the interest paid over the life of the loan will increase, so be sure to only extend it for a small number of years to keep the overall cost of the loan at a reasonable amount.
Apply for a Forbearance
A forbearance grants temporary relief for a specified period, typically up to 12 months. However, it is important to understand that the interest will continue to accrue. “What the lenders or their loan-servicing company agents don’t always explain is that forbearance isn’t forgiveness — the interest that is not paid during the relief period will be added the loan balance, which will only make matters worse later on,” says Mitchell Weiss, a financial services industry executive and Credit.com contributor, in a recent interview. Therefore, you should only exercise this option when no other options are available.
Income-Based Repayment and Income-Contingent Repayment Plans
Available only to federal loan recipients, these programs make payments more affordable. IBR plans adjust the monthly assessment so it equals 15% of your discretionary income. The ICR uses a system that factors in income, family size and the outstanding debt balance to calculate the monthly payment. After a period of 10, 20 or 25 years, the loan balance may be forgiven, but this varies by loan program.
The Bottom Line
Temporary relief from student loan debt may provide a quick breath of fresh air, but can be extremely dangerous in the long-term. In some instances, additional fees may be assessed to take advantage of these opportunities, particularly with private lenders. If at all possible, cut costs and allocate any available funds toward repayment efforts. Also, seek job opportunities that offer loan forgiveness.