When student loans are unaffordable

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Mar 8, 2018

In theory, paying off student loan debt gets easier over time, as salaries start to rise. But as any borrower who experiences an income interruption can attest, those monthly payment plans can be a major ball and chain when your salary suddenly slips. In some cases, it can bury your budget.

Any number of scenarios can compromise a borrower’s ability to manage their student loans, from a job loss, to a lower-paying career change (think nonprofits), to a short-term disability. Some, too, simply borrowed more than they can realistically repay.

“When you are done with school, there are lots of reasons why student loan debt may seem unaffordable,” said Karen McCarthy, director of policy analysis for the National Association of Student Financial Aid Administrators. “Colleges are becoming more expensive than they used to be and students sometimes apply for new loans without thinking about it, and then when they graduate they have a giant stack of loans.”

According to the Institute for College Access & Success (TICAS), seven in 10 seniors (69 percent) who graduated from public and nonprofit colleges in 2015 had student loan debt, with an average of $30,100 per borrower. Roughly one-fifth of graduates’ debt (19 percent) was in private loans, which are generally more costly and provide far fewer consumer protections and repayment options than federal student loans, TICAS reports. (2015 data are the most recent available, since most student loans have a six-month grace period before graduates must begin paying back what they owe.)1

Roughly 11.3 percent of borrowers defaulted on their student loans in 2016, according to the Department of Education.2

By working closely with your lender, however, you may well be able to avoid a similar fate.

“There is definitely a need for borrowers to become more aware of the options they have and seek out long-term solutions that keep them out of default,” said TICAS Associate Research Director Diane Cheng. “Defaulting on your loan can have really serious consequences, making it much harder to get the best available rates for a car loan, home mortgage, or any other form of credit.”

Your repayment options differ, of course, depending on what type of loan you have.

If you have a federal loan

Except in a select few circumstances, discharging your federal student loan in a bankruptcy proceeding is rarely allowed. If you end up in default, the entire unpaid balance of your loan and any interest would become immediately due and the federal government will take aggressive action to reclaim what you owe, including using a collection agency, garnishing wages, and withholding tax rebates.

The good news is, however, it need not come to that.

“One thing about student loans is there is generally no way to get out of it because you can’t discharge student loans in bankruptcy like some other loans,” said McCarthy. “But there really isn’t any reason to go into default with all of the repayment plans available.”

If you lose your job or leave the workforce temporarily, for example, you may qualify for deferment, which allows you to postpone your federal student loan payments for a period of time. Bonus: The government may even pay the interest on your Federal Perkins, Direct Subsidized Loan or Subsidized Federal Stafford Loan during the deferment period, but it will not pay interest on your unsubsidized loans, or PLUS loans. The Department of Education notes that the borrower will ultimately be responsible for paying the interest that accrues on those types of loans.3

In cases where you do not qualify for deferment, and cannot keep pace with your monthly loan payments, the government may also grant you forbearance, which would allow you to halt payments or reduce the size of your monthly payment for up to a year. Interest, however, would continue to accrue during that period on your subsidized and unsubsidized loans, including all PLUS loans.

By far, however, income driven repayment plans are the most common source of loan relief. Such plans, which have been available to borrowers since 2009, cap payments based on the borrower’s income and family size. Depending on your income, those “payments” can even be zero.

“Many students are surprised to learn that if their income is low enough, their required monthly payment will actually be zero dollars,” said Cheng. “Income-driven plans are a better long-term solution for students struggling to repay their loans. They would not be considered delinquent and, importantly, these types of income-based repayment plans offer a light at the end of the tunnel.”

Why? If your federal student loan isn’t fully repaid at the end of the repayment period, which is either 20 or 25 years depending on the type of income-driven repayment plan you have, any balance that remains is automatically forgiven.

If you have a private loan

Those having a hard time with their private student loans have fewer options, but they’re not out in the cold.

“Where private loans are concerned, the most important message is that borrowers should stay in contact with their lender when they fall on hard times,” said Cheng. “It’s a natural response for some people to stop opening the mail when they’re having trouble paying loans, but you need to reach out to your lender.”

No standardized repayment options exist in the private loan market, she notes, so there is no guarantee that your lender will offer leniency. 

“But most lenders do have some options available, which may include interest free deferment,” Said Cheng.

Because most private loans are cosigned, often by a parent, Cheng said it is especially important that graduates take their student loan payments seriously. If you stop making payments, the lender will go after your cosigner for the balance due. “If you are not paying on your loan it will not only damage your own credit rating, but your cosigner’s as well,” she said.

Can my loans be forgiven?

Indeed, student loans are a financial obligation. Generally speaking, you must pay back what you owe regardless of whether you complete your education, can’t find work, or are unhappy with your degree.

In a select few cases, however, the government may forgive, cancel or discharge a portion of your federal student loan debt. (Such lenience is rarely granted by private lenders.)

In the case of a total and permanent disability, for example, the government may relieve you from having to repay a Direct loan, Federal Family Education Loan (FFEL), Federal Perkins Loan, or complete a Teach Grant service obligation on the basis of your disability.

Teachers who work full-time in a low-income elementary or secondary school or educational service agency for five consecutive years may also be able to have as much as $17,500 of their subsidized or unsubsidized loans forgiven (PLUS loans cannot be included).4

Similarly, if you’re making income-based payments and also working towards loan forgiveness under the Public Service Loan Forgiveness Program, you may also qualify for forgiveness of any remaining loan balance after 10 years.

In rare cases in which you can prove to a bankruptcy court that repaying your student loan would cause undue hardship, your loan may also be discharged in bankruptcy. (But, again, that’s rare.)

Student loan relief for disability

A short-term disability, due to illness or injury, can also make student loan payments temporarily unaffordable.

The Social Security Administration reports one in four of today’s 20 year-olds today will become disabled before they reach retirement age.5

Some two-thirds of Americans are not covered by employer-sponsored disability insurance and nearly all (90 percent) households report that they would suffer financial hardship if they were unable to work for a year due to injury or illness, according to the Consumer Federation of America.6

To help guard against the risk of default, some disability income insurance providers offer an optional student loan rider to help young professionals make their loan payments for a fixed number of years (often 10 or 15 years) in the event they should become temporarily disabled. Such policies are also designed to help replace a portion of their lost income while they are unable to work.

Find an employer to pay the tab

Another possible way to cut your student debt down to size is to work for a company that offers student loan repayment after a certain period of employment, an increasingly popular recruiting and retention tool in the job market as employers recognize the student loan burden many millennials face.

In a perfect world, student loan debt gets easier to pay back over time, but it doesn’t always work that way.

By staying in touch with your lender, however, and exploring your repayment options, you will likely be able to avoid the worst case scenario and keep your credit rating intact.

“Reach out to whoever holds your loan and see what they can do for you,” said Cheng.

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1 The Institute for College Access & Success, “Average Student Debt at Graduation up 4% to $30,100 for Class of 2015,” 2016.

2 Department of Education, “National Student Loan Default Rate” 2016.

3 Department of Education, “A deferment or forbearance allows you to temporarily postpone making payments or to temporarily reduce the amount you pay,”

4 Department of Education, “Wondering whether you can get your federal student loans forgiven or canceled for your service as a teacher?”

5 Social Security Administration, “The Faces and Facts of Disability”

6 Consumer Federation of America, “Facts About Disability Insurance,” 2012

 

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.