June 2021
College and Tax Planning

Student loans are one of the most significant financial burdens that many young Americans face. Making these payments on top of other financial responsibilities can be challenging. As a result, more than 1 million student loan borrowers go into default every year. Furthermore, a study by the Federal Reserve found nearly one in five student loan recipients were at least 90 days behind on payments. There can be many negative consequences of failing to make your student loan payments, including wage garnishment, a drop in your credit score or a suspension of your professional license. Luckily, there are steps you can take to prevent this — so act early if you’re struggling to make your loan payments.

1 . If you can’t make your federal student loan payments during the COVID-19 outbreak, you’re in luck. The federal government has suspended payments and interest on all federal student loans through September 30, 2021. But if you still can’t make your payments once the suspension of loan payments has ended, you still have a number of options.

• If you can make your payments the first thing you might consider is changing your repayment plan. The federal government allows borrowers to change their repayment plan at any time for free, so you can switch to one that better fits your situation. The standard repayment plan requires borrowers to pay off their loans in 10 years. But someone with more than $30,000 of debt is eligible for an extended repayment, which gives you an extra 15 years to pay off your loans. The variety of income-based repayment plans guarantee that your monthly payments don’t exceed a certain percentage of your income.

• If you can’t make your payments at all, a new repayment plan likely isn’t going to be enough. In that case, you might consider either deferment or forbearance of your loan to temporarily suspend payments.

  • Deferment allows you to postpone loan payments and pauses interest accrual on subsidized student loans. At the end of the deferment period, interest will be capitalized (meaning added to the principal balance to also accrue interest).

  • Forbearance is a similar concept, except that interest will accrue the entire time.

  • For both programs, you may need to provide your loan servicer with proof of your financial hardship. Make sure to take this step as soon as you know you can’t make your payments because you can’t enter deferment or forbearance once you go into default on your loans.

2. Private student loans can be a bit trickier than federal ones. These loans don’t often come with flexible repayment plans. Most often, your lender simply puts you on a repayment plan that will have the loan fully paid off on their desired timeline.

• If you can’t pay, your first step should be to call your lender and ask if they have any special repayment programs. For example, SoFi offers an Unemployment Protection Program, which allows for a 12-month forbearance if you lose your job through no fault of your own. Sallie Mae offers forbearance for borrowers facing temporary financial hardship, also for up to 12 months.

• Another option for making your payments more affordable is to refinance your private student loan. By doing so, you may be able to reduce your interest rate, extend the life of your loan, or both for purposes of lowering your monthly payment and catching up on overdue payments.

42 million Americans have student loan debt, and before the COVID-19 outbreak, only about half of those were in repayment. The rest were in forbearance, deferment, or default. As the number of people who can’t make their student loan payments increases, it’s more important than ever that borrowers understand what happens if they don’t pay their student loans. It’s not a problem that goes away. But by implementing some good budgeting measures coupled with a suggestion or two listed above can keep you or a loved one on track and in a good credit rating. If you have questions on how to best pay for college or work your repayment schedule into a long-term financial plan, give us a call at the office

If you have questions, please contact us.

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