It Will Lower Your Credit Score
Credit bureaus will not disclose the formula they use to calculate credit scores. But we know that each late payment report has the potential to lower credit scores, and a default rating will also serve to lower the credit score,Jarvis said.
In other words, expect an improvement in your score every time you miss a payment.
The lower your credit score, the more you will pay :
- cell phone plans
A low credit score can even make you unemployed. A study found that 60% of companies verify all or part of applicants credit ratings.
Make Sure The Default Is Correct
The very first thing to do is make sure your lender didnt put your loans into default by mistake.
Youll likely know whether youve been missing your student loan payments. If you know youre on-time with your payments or arent past-due enough for default, reach out to your loan servicer to fix the mistake.
Can You Get Rid Of Your Student Loans
Usually, the only way to get rid of student loans is to pay them.
Federal student loans arent like other debts that have a statute of limitations and eventually fall off your credit report if you dont pay them. Federal student loans have no statute of limitations, meaning the government can try to collect their money for as long as they want.
Unlike other debts, student loans are rarely discharged during bankruptcy .
One clear path to getting rid of federal student loans without fully paying them off is to become eligible for student loan forgiveness or discharge.
Types of forgiveness and discharge include:
- Public Service Loan Forgiveness: Available to borrowers employed by a government or nonprofit organization who make at least 120 on-time payments while working for a qualifying employer.
- Teacher Loan Forgiveness: Available for up to $17,500 of forgiveness to teachers who work in a low-income school for five years.
- Closed School Discharge: Available to borrowers whose school closes while they are enrolled or soon afterward.
- Total and Permanent Disability Discharge: Available to borrowers who are permanently disabled.
Keep in mind that forgiveness programs often require you to make on-time payments for a specific number of years. These programs wont get you out of making at least some payments.
Its important to note that private student loans work a bit differently. Private student loans do not qualify for forgiveness programs.
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Look Into Student Loan Forgiveness Programs
If youre pursuing a career in certain industries such as government, military, healthcare, education, nonprofit, or law you may qualify for student loan forgiveness programs.
Typically, youll need to have worked full-time in one of these fields for at least 10 years. Even then, youll need to apply for these competitive programs and meet other eligibility requirements. But, if awarded, youll have a portion of your debt eliminated.
For more information, check out our post onhow to apply for student loan forgiveness programs. In that post, we also discuss President Bidens October 2021 update to the Public Service Loan Forgiveness program!
Thats A Lot To Consider How Do I Choose The Best Plan
Analyzing the plans is an agonizing exercise, which is why you should visit the loan simulator tool at StudentAid.gov. It will guide you through the options and help you decide which plan best fits your goals finding the lowest-payment plan, for example, versus paying loans off as soon as possible.
It is, fortunately, easy to use: When you sign in, it should automatically use your loans in its calculations. You can also compare plans side by side how much theyll cost over time, both monthly and in total, and if any debt would be forgiven.
For most borrowers, income-driven or extended plans will yield the lowest monthly payment, experts said.
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Use Our Repayment Planner
You can make informed decisions about your loans using our interactiveRepayment Planner.It helps you understand your current plan and guides you to a repayment option that fits your situation.
To help you succeed in repaying your loans, the Repayment Planner shows you:
- A dashboard of your current plan, including what you have left to repay and how you’ll repay it
- A timeline of events from now until repayment ends to help you avoid surprises
- The total amount you have left to repay and your final payment date
- Ways you can take action to achieve your repayment goalspart of that may include changing your repayment plan
- More details for each of your loans, focusing on your payment plan and your monthly payment
Pay Off The Past While Working For The Future
Yes, we all must pay off our debt. But we also need to simultaneously build short-term and long-term savings, even if it means taking a bit longer to get out of debt. Focusing exclusively on debt repayment is the worst thing you could do for your emotional, physical and financial self.
Spending years paying off debt without saving a dime will crush you in the long run. Sure, getting out of debt is a net positive experience. But if youre sacrificing so much of your day-to-day life and income to pay off debt, youll have nothing to show for it once your debt is paid off. However long it takes, youll be waiting years before you can start putting anything away, and that can be a serious drag on your emotional and mental health.
Ive seen clients who are so focused on getting out of debt that it clouds their ability to see the future, making them afraid to set goals and even talk about their finances. I often hear clients say, I can’t possibly think about the future when I’m in this much debt. But here’s the reality: Debt and your future have very little to do with each other. Having debt should not deter you from making plans and living the life of your dreams.
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Debt Snowball Or Debt Avalanche
If you have a mix of federal and private student loans or many different loans, you might want to consider a different approach. Debt elimination plans, like the debt snowball or debt avalanche, might help you chip away at your student loan debt faster.
With both of these debt elimination methods, you begin by listing out each debt, including the total amount you owe, your monthly payment, the interest rate and the due date. Next, make minimum payments on all your loans.
Heres where the strategy starts to differ.
- For the snowball method, apply every spare dollar you have toward the debt with the lowest balance.
- For the debt avalanche method, put every spare dollar toward the debt with the highest interest rate.
Repeat your chosen action until you pay off the first debt on your list. Then move on to the next-smallest debt and repeat the process until all of your student loans are paid in full.
Apply For A Disability Discharge
No one wants to imagine the worst that will happen, but sometimes they do. Fortunately, if you become disabled and unable to repay your student loans, the Total and Permanent Disability Leave program can clear the list.
The program is available to most federal student loan borrowers, but not all types of loans are eligible. To apply, you must complete an application and provide documentation showing that you are totally and permanently disabled.
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What Is The Interest Rate On Plan 1 Student Loans
The interest rate for Plan 1 loans is usually set each September and is always at whichever is lowest between:
- The RPI rate from March of the same year
- The Bank of England base rate plus 1%.
Unlike Plan 2 loans, the interest rate on Plan 1 loans is the same whether youre studying or have graduated, and isnt affected by how much youre earning either.
From 1st September 2022 31st August 2023, The Bank of England base rate is what were interested in , so the base rate plus 1% is 2.75%. This is lower than the RPI figure from March 2022 which was 9%. Therefore, the interest rate on Plan 1 Student Loans is 2.75%.
Of course, as you may have seen on the news, the Bank of Englands base rate can change throughout the year. And if and when this happens, the interest rate on Plan 1 Student Loans can change before its usual September review.
The coronavirus crisis underlined this fact and, in March 2020, the base rate dropped twice in just over a week first from 0.75% to 0.25%, and then again to 0.1%. As such, a few weeks later, Plan 1 Student Loans had their interest rate cut to 1.1% .
You can see interest rates for previous years on the Student Loans Company website.
How To Lower Student Loan Payments When They Resume
Some borrowers wonât have trouble making payments when student loan bills start arriving this fall. But for others â recent graduates, parents, borrowers in student loan default, and so on â the payment amount wonât fit their budget, which could force them to make tough choices. Thankfully, federal student loans have flexible repayment options to accommodate most situations.
Hereâs how to lower student loan payments, depending on your situation.
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The Account Is In Default
When your payment is 270 days late, it is officially in default. The financial institution to which you owe the money refers your account to a collection agency. The agency will do its best to make you pay, short of actions that are prohibited by the Fair Debt Collection Practices Act . Debt collectors also may tack on fees to cover the cost of collecting the money.
It may be years down the road before the federal government gets involved, but when it does, its powers are considerable. It can seize your tax refund and apply it to your outstanding debt. It can garnish your paycheck, meaning it will contact your employer and arrange for a portion of your salary to be sent directly to the government.
Consider Student Loan Consolidation
If you have multiple student loans, federal and private, you may consider replacing them with one direct consolidation loan. This could make tracking your student loan payments more manageable. You may also benefit from lower monthly payments since youd receive a longer repayment term.
One more thing! You also only get to consolidate your federal loans once. So, its important to really weigh thepros and cons of consolidation beforehand.
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What If I Filed A Borrower Defense Claim
If you have a pending application or your application has been approved but is not yet discharged you will not have to make payments when the pause ends. You will remain in forbearance if you find yourself in one of the following situations:
You filed an application, but havent yet received a response.
Your claim was approved, but the loans havent been discharged yet.
You received a denial letter on, or after, Dec. 1, 2019.
You submitted a reconsideration request and the department is reviewing it.
Can Unpaid Student Loans Result In Your House Being Taken
No, unpaid student loans do not result in your property being seized. Student loans are unsecured so they do not have any collateral that can be legally seized. A private lender, such as a bank, would have to sue you and win to be able to seize your assets. For federal loans, your wages can be garnished or your tax refunds withheld.
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What To Do If You Cant Pay Your Federal Student Loans
If you cant make your federal student loan payments during the COVID-19 outbreak, youre in luck. The federal government has suspended payments and interest on all federal student loans through September 30, 2021. You are not required to make payments during this time.
If you still cant make your payments once the suspension of loan payments has ended, you still have a number of options.
One of the benefits of having federal student loans is that they have plenty of options available to make it easier to pay your loan or pause payments altogether in some situations.
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 dont exceed a certain percentage of your income.
If you cant make your payments at all, a new repayment plan likely isnt 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.
Social Security Payments Garnished
Defaulting can adversely affect your retirement plan, at least for federal student loans.
Known as Social Security garnishment, the government can take up to 15% of your Social Security benefit. While this doesnt apply to private student loans, this is something you should definitely be aware of for federal student loans.
Note: Collection agencies are currently prohibited from garnishing Social Security benefits due to the COVID-19 student loan relief effort. This is in effect through at least September 30, 2021.
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A Reminder About Your Student Loan Debt
It’s important to remember that, even if you don’t pay your student loans, the government or your lender will always get their money for your loan. That’s because they can garnish your wages and taxes to make sure that they get paid back.
According to the 2013 Department of Education budget, after the federal government pays collection agencies to recover the loan, the government is likely to recover about 96% of what the borrower owes. Do you see that – so even if you don’t pay your loan back, the government, AFTER paying a collection agency, still gets back 96% of what they were owed. You cannot escape your student loans, and not paying them is not the answer.
Have you ever considered ditching your student loans? What steps have you taken?
Increase Income Cut Expenses
Two things anyone can do to help themselves out of financial stress is to find a second source of income and/or reduce spending in every category in their budget.
There is money to be made taking a second job as a tutor, a coach, a freelance writer or even taking on the traditional side jobs as a waiter, pizza delivery or babysitting. Create a bank account where any money made on the side goes and use that to make payments on student loans.
The added benefit of a second job is that you have less time to spend money on things like dining out, entertainment, clothes, etc. That means you already should be started cutting expenses in the areas where want so often supersedes need.
Try a few more expense-cutting steps like getting a roommate to share rent/utilities/food expenses using public transportation or walking instead of having the expense of a car move home with you parents until you earn enough to afford expenses and student loan debt.
These might feel like drastic steps, but there arent nearly as penalizing as defaulting on a loan.
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Look Into Loan Forgiveness
Another option you can consider is loan forgiveness.
Through the Public Service Loan Forgiveness Program, federal student loan borrowers working in public service with an elected government or nonprofit agency can cancel their loan after 10 years of eligible monthly payments.
Income-oriented plan borrowers may be eligible for loan forgiveness on their loan balance if they make eligible monthly payments for 20 to 25 years.
I Can’t Pay My Student Loans What Should I Do
If you canât pay your student loans, do everything to avoid defaulting on your student loans. These options may save you from the consequences of defaulting:
- Sign up for an income-driven repayment plan. IDR plans set your monthly payment based on your discretionary income and family size, so you shouldnât have to pay more than youâre able. Remember, IDR plans stretch your repayment term to 20 or 25 years, so consider your long-term financial situation.
- Ask for a deferment or forbearance. Both options give you breathing room to figure out your next steps for dealing with your debt. But there is a downside to forbearance: capitalized interest. Deferment requires more paperwork but usually prevents interest from accruing while you get a break from making payments.
- Refinance private loans with a new lender.Student loan refinance can get you better interest rates and repayment terms depending on your credit. I recommend refinancing private loans for better terms, but never federal loans since you lose many benefits.
- File for bankruptcy. Chapter 7 or Chapter 13 bankruptcy will pause your payments and protect your cosigner. Both chapters wipe out your bills for credit cards, medical expenses, and car loans. To eliminate your student loan debt in bankruptcy, you’ll need to go through the more complicated process of filing a student loan adversary proceeding and proving undue hardship. This is particularly difficult, but not impossible, with federal student loans.
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