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Options for Paying Student Loans Between Jobs

Young man concerned about student loan debt

If you make hefty student loan payments each month, you’re not alone. The average monthly student loan payment for borrowers in their 20s is $351—more than $4,200 per year. That’s a lot of fancy computers, tropical vacations, and down payments sacrificed.

The good news is that higher education is almost sure to boost your lifetime earnings. However, when you are between jobs or underemployed, the pressure to keep up with your student loan payments can be crippling.

How crippling? Of all the people who started repaying their federal student loans in 2013-2014, 11.5% have already defaulted on their loans.

What many people may not realize, however, is that lenders are ready and willing help borrowers stay afloat during times of unemployment or other economic hardship. After all, they have an interest (pun intended) in your ability to pay off your debt over the long run. If you’re struggling to make payments, here’s what to know about approaching lenders for help.

Avoid Student Loan Delinquency and Default

The key is to avoid delinquency and default, which will ruin your credit and limit future options for arranging different payment plans. When you fail to make regularly scheduled payment on your student loans, they go into delinquency and, later, default.

Consequences of delinquency:  Your status is considered delinquent the first day after you miss a payment. After 90 days of delinquency, your loan servicer will report it to national credit bureaus and your credit score will lower. A low credit score will make it difficult for you to get credit cards, a car loan, or a mortgage. It even affects your cell phone plan options or whether or not a landlord will rent to you.

Consequences of default: While each loan has specific terms for when it is considered in default, you can be sure you’ll find yourself there if you don’t make scheduled payments for several months.  Once in default, you will no longer have the option to receive deferment or forbearance of your loans, or even the right to choose a repayment plan.  Your loan holder can even take you to court.

If you are struggling to make your payments, the first thing to know is that your lenders want to work with you to come up with a plan to keep you from failing. You have to work with your loan servicer to apply for either a deferment or forbearance. It’s likely you will be able to arrange an agreement with them, whether that’s a temporary hold or an adjustment to your monthly payments

Here’s how to go about it:

Step 1:  Call your lender or student loan servicer

Don’t know how? If your loan came through the U.S. government, log in to My Federal Student Aid to find the name of your servicer.  If your loan is private, call up the company through which your loan was financed.

You will have to show documentation that you meet the eligibility requirements for suspending your student loan payments.

Step 2: See if you can defer payments until you are back on your feet

Deferring loan payments means suspending all payments on your loans for a specified period of time.  If you are unemployed, unable to find full-time employment, or are experiencing economic hardship, you may be able to defer your payments for up to 3 years.

Even better, some loans (for example, direct subsidized and subsidized federal Stafford Loans) will not require you to pay the interest that accrues while you are deferring payments. With other types of loans (including unsubsidized and Direct PLUS loans), however, you will be responsible for paying all the interest that accrues once you are back on a payment plan.

Don’t know what type of loans you have?  My Federal Student Aid will help you figure out it out.

Step 3: If you can’t defer, look into forbearance

During forbearance, you are responsible for paying the interest that accrues on your student loans, no matter what type of federal loans you have. You can request general forbearance if you are unable to make your monthly payments due to, for example, financial difficulties, medical expenses, or changes in employment.  Forbearance expires after a maximum of 12 months, and then you have to reapply.

You may either pay the interest as it accrues or you can allow it to accrue and be added to the total principal balance (have it be capitalized) until the end of the period. Because adding it to the principal balance means you will pay more on it in the long run it’s better to pay the interest as you go if at all possible.

Step 4: Keep paying your loans until your loan deferment or forbearance is in place

You did right by contacting your lender, but remember that making arrangements isn’t enough to protect your credit from delinquency. Until your new payment terms are in place, you are still required to pay what you initially agreed to.

Step 5: Don’t use other forms of debt to pay your student loans!

Even if you are fortunate enough to defer your loans until you are gainfully employed, be wary of the other risks you may encounter when it comes to racking up debt (and interest). Namely:  credit cards or, even worse, high-interest PayDay loans. Even with that emergency savings you’ve set aside (right?), you are likely to have to change your lifestyle for a period of time. Unsubscribe from gym and movie subscriptions. Stop eating out. Check out these tips for making ends meet when you’re between jobs. Try to approach each sacrifice as further motivation to start post-layoff networking.