How to avoid default, credit damage and extra fees when you can’t pay student loans.
Dealing with student loan debt is rarely easy, but sitting there stressing that you can’t pay your student loans back is one of the worst financial stresses you can face. Student lenders can garnish wages and tax refunds, draining your paychecks and leaving you with nothing to cover bills. Defaulting can ruin your credit and set you back from achieving other life goals, such as buying a home or a car that you need to get to work.
So, what exactly happens when you can’t pay student loans and how can you avoid the negative effects that come with it?
What to expect when you can’t pay student loans off
If you can’t pay student loans according to the set payment schedule, then you can expect to be headed for default.
- When you first miss a payment, your loan may be subject to late fees and penalties; all fees and penalties should be outlined in your original loan agreement
- Student loans become delinquent after 30 days of nonpayment; delinquent loans may be subject to additional fees and penalty charges, outlined in your original loan agreement.
- Any payments that are not made within 30 days are reported to the credit bureaus as a missed payment; missed payments are reported at 60, 90 and 120 days as well.
- After 270 days of nonpayment (i.e. 9 months without a payment), your loans move to default status.
- At this point, the lender may decide at any time to write your loan off as a loss and sell it to a collection agency.
During the delinquency period and even after default, your loan will continue to accrue interest charges. So, if you’re not making payments, expect your balance to be higher once you have the means to start paying it again. Even after your loan defaults and goes to collections, interest charges and fees can still apply. As long as the collector applies fees and interest charges according to your original loan agreement, it’s entirely legal for them to keep adding to what you owe.
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Getting out of default when you can’t pay student loans
There is a silver lining when it comes to defaulting on student loans. The good news is that the credit system is more forgiving about student loan defaults than default on other types of debt.
If you default on a student loan, you can bring the loan current by making six consecutive payments on time. Once you do so, the lender must remove any missed payments from your credit history. So, it’s effectively like you made the payments on time and never missed any – at least for your credit. This is unique to student loans, so it’s definitely something to be aware of and use to your advantage if you default.
Still, any interest charges and fees added after default will still apply. So, you may have a bigger hole to climb out of after default. But eliminating the damage to your credit score by removing the missed payments from your credit history is huge. After you get out of default, make sure to review your credit report to make sure this happens.
4 Options for Student Debt Relief If You Can’t Pay Student Loans
Ideally, you want to avoid default if it’s at all possible even if you can’t pay student loans off given your current financial situation. Luckily, there are four options that you can potentially use, depending on your situation.
Option 1: Deferment
This option allows you to postpone payments on principal and interest for student loans. When your loans are deferred, you are not required to make any payments. In some cases, for federally subsidized loans, the federal government will pay interest charges during loan deferment. That means your student loan balances won’t increase during deferment. At the end of the deferment period, you’d owe exactly what you owed when you started.
If your interest charges aren’t paid by the government, then interest continues to accrue while you’re not making payments. That means your balances will be higher at the end of the deferment period unless you pay interest charges during deferment. This happens with unsubsidized federal loans and private loans that offer deferment (not all do).
Qualifying for deferment: You can defer your loan payments if you are:
- Underemployed and able to prove financial hardship
- Enrolled at least half-time in school
- Serving in the military or Peace Corps.
You must apply for a deferment with your loan servicer. All federal loans (both subsidized and unsubsidized) are eligible for deferment. Some private student loans may also qualify for a deferment if the lender offers it.
When is deferment is the best option? Deferment is best used when you can prove you don’t have the income to make any payments. If you don’t have any income coming in or you can show that your income doesn’t cover your bills and other expenses, then deferment is the way to go.
Option 2: Forbearance
Forbearance is like a lighter version of deferment. In student loan forbearance, the lender agrees to reduce or stop your monthly payments temporarily. Payments can be postponed completely, like they are with deferment, but only for a limited amount of time – 12 months maximum.
At the end of forbearance, you must return to the original repayment schedule; some lenders may also require “catch-up” payments, where you pay more or make extra payments to catch up on what you missed. Again, as with deferment, the government covers interest charges that accrue during forbearance with subsidized federal student loans. On unsubsidized loans, interest charges continue to accrue, so your balances may higher at the end of forbearance, even if you’re making reduced payments.
Qualifying for forbearance: Like deferment, you apply for forbearance through your loan servicer. All federal loan servicers offer forbearance. Many private student loan servicers do, as well. Contact your lender BEFORE you miss payments and discuss your financial situation. As long as you can show that you’re facing financial hardship and can’t afford to make your payments, the lender will work with you to find a solution.
When is forbearance the best option? Forbearance is easier to qualify for than a deferment. If you can provide financial hardship or show you have an illness that leaves you unable to work, you can usually qualify for forbearance. Federal student loan servicers and even private lenders also offer forbearance during residency programs or if you’re in the National Guard and the Guard is activated by your state governor.
Option 3: Pay nothing on PayE or RePayE
There are two federal student loan repayment plans that allow you to pay nothing without penalties.
- Pay as You Earn (PayE)
- Revised Pay as You Earn (RePayE)
Both of these programs are hardship-based repayment plans. That means qualifying for them is based on financial hardship – i.e. you don’t have enough income to cover your bills.
You qualify based on income and family size. If your income falls at or below 150% of the Federal Poverty Line in your state for a family of your size, you qualify. In this case, the monthly payment equals about 10% of your Adjusted Gross Income (AGI – the income reported on tax returns).
However, if your income falls below the Federal Poverty Line for your state for a family of your size, then the payments decrease even further. At a certain level, you pay nothing at all. But they don’t penalize you for a missed payment. It’s counted like you made the payment, but your payment happened to be $0.
Qualifying for $0 payments on a federal repayment plan: Qualifying for $0 payments under these two programs must be done in a few steps. First, you may need to consolidate with a Federal Direct Consolidation Loan. That will make more debts eligible for a federal repayment plan. Then you apply for PayE or RePayE, where you must certify your AGI and family size. The lender will tell you the amount you must meet for a “qualified payment.” As long as you’re below the Federal Poverty Line for your state for a family of your size, you should qualify.
When is a hardship-based federal repayment plan the best option? Check the Federal Poverty Line for your state, based on family size. If you make less than that, then this may be the best option.
Option 4: Consolidate with a private student loan
First and foremost, be aware that this option only applies when you can afford to pay something, just not everything you owe. If you have no income at all to make payments, then this option won’t work. It’s only meant for people who can afford to make payments but can’t afford to the total payments on their individual loans.
Private student loan debt consolidation allows you to take out a new loan at a lower interest rate. You use the funds from the loan to pay off your original loans. In many cases, since you consolidate and reduce the rate applied to the debt, you may pay less each month.
Keep in mind that if you use this option to consolidate federal loans, you lose eligibility for all federal programs. That means you can’t decide to go back and use PayE or RePayE instead. You also won’t qualify for Public Service Loan Forgiveness if you’re a public service professional. So, think carefully before you decide to combine loans with private consolidation.
Qualifying for private student loan consolidation: You apply for a student debt consolidation loan through a private lender. You qualify based on your credit score and debt-to-income ratio. The good news is that student loan servicers tend to have more flexible lending standards. So, even if you have bad credit or no credit, you can often find a service that’s willing to work with you.
When is private consolidation the best option? Private consolidation is best when you have the means to make at least a reduced payment on your student loans. It’s not for people facing financial hardship. Instead, it’s for people who just need a little more breathing room and want to save money. Reducing the interest rate on student loans can save you thousands during repayment.
Can’t Pay Student Loans Reference Guide
|Financial Situation||Best Solution|
|Out of work due to illness or injury||Deferment|
|Unable to work due to temporary illness or injury||Forbearance|
|Under-employed||Deferment or Forbearance, depending on severity of financial hardship|
|Low-income||PayE or RePayE hardship-based federal repayment plans|
|Struggling to afford all individual loan payments, but not facing financial hardship||Private Consolidation|
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More important questions when you can’t pay student loans
I can’t pay my student loans. What should I do?
Contact your loan servicer immediately.
Many people think hiding from your lender is smart when you can’t pay, but it’s the exact opposite of what you should do. Hiding from your lender pretty much guarantees your loan will lapse into default due to nonpayment. The lender won’t think twice about sending your loan to collections.
But calling your lender means you can discuss options that will keep you out of default and help you avoid credit damage. You can see if you qualify for deferment or forbearance. If the loan is a federal loan, they are also required by law to provide options for repayment plans designed for financial hardship. But you usually must ask to get the information you need.
So, don’t hide. Call your lender at the first sign of trouble and see what you can work out.
Will it hurt my credit score if I can’t pay my student loans?
Not necessarily. It does not hurt your credit score when you don’t make payments during an approved deferment period. If you get approved for forbearance with no payments, it also won’t hurt your credit score. Finally, if you qualify to reduce your payments to $0 on PayE or RePayE because you fall below the Federal Poverty Line in your state for your family size, then it won’t damage your credit either.
Basically, as long as the lender agrees that you don’t have to pay anything, it won’t create negative remarks in your payment history. Nonpayment only hurts your credit score when the lender reports a missed payment to the credit bureaus. That only happens if you don’t talk to your lender to make arrangements ahead of time. Again, always talk to your loan servicer if you’re struggling to make your payments.
Why can’t I pay my student loans with a credit card?
When people run into situations where they can’t afford all their bills, sometimes they try to juggle. For instance, you pay one credit card with another or put bills on a credit card. Some people even use credit cards to pay off tax debt because even though it’s usually a big balance at a high interest rate, it’s better than facing IRS penalties.
But this doesn’t work with student loans. Most student loan servicers will not allow you to use a credit card to make a payment. The reason is that the servicer (and the federal government) do not want you to convert student loan debt to personal debt. That’s because student loans have special rules, so the debt tends to be kept separate and treated as unique.
Specifically, in this situation, they don’t want you to convert the debt and then declare bankruptcy. Student loans are not easily discharged during bankruptcy – you must prove that non-discharge would cause you continued and extreme financial hardship. By contrast, credit card debt is fairly easily discharged during bankruptcy. So, paying off student loans with credit cards seems like a bait and switch that could lead to bankruptcy fraud. Thus, most lenders won’t let you use credit cards to pay off your loans.
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