If you’re looking for help with your student loans, you have plenty of options. From forgiveness to forbearance to consolidation, the terms and choices can seem endless! Here’s what you should know about most student loan help options—almost all of them slow down your progress in paying the loans off. The exception is refinancing, which for many borrowers is a good way to hurry up and get debt-free. The ultimate point, though, is you just need to get rid of your student loans . . . for good!
1. Student Loan Forgiveness
We all need forgiveness sometimes. But this type of forgiveness isn’t all it’s cracked up to be. Maybe you were hoping you could let your lender know you regret going into debt, and they’d just drop it like it’s no big deal? It’s actually way more complicated than that.
Although there are several programs that can help you get loans forgiven, you have to meet pretty hefty requirements to prove you qualify. Here are a few types:
- Teacher Loan Forgiveness. This one has several conditions you have to meet, including a five-year stretch in a position teaching low-income students at an educational service agency or at the elementary or high school levels. The five years have to cover five consecutive academic years, and your loan must have been taken out before the end of the five years of service.
- Public Service Loan Forgiveness. Going this route for forgiveness is even tougher, because you not only have to work a certain job and go 10 years without a single late payment, you also have to apply to get the loan forgiven—and only about 1% of applicants are granted!1 Don’t make your financial plans around this kind of a gamble.
- Disability Discharge Forgiveness. Borrowers who can certify a disability through a physician, Veterans Affairs or the Social Security Administration are eligible for a discharge. But it involves several steps, including a three-year monitoring period after discharge to prove you’re still disabled.
- Forgiveness Due to a Problem From Your School. Whether you’ve been defrauded by your school with misleading information from them, or you lost resources due to your school closing while you were enrolled, there’s a slim chance you could get forgiveness. This is only available for federal loans, and you can apply for it through the federal student aid website.
If any of these options fit your situation, more power to you! But considering all the time and trouble to qualify, we’ve found these rarely help anyone move the needle on financial progress.
2. Income-Based Repayment
If you can’t get your balance forgiven, it’s possible you can use an income-based program to lower the monthly payments on federal loans based on your income and family size. You can apply for all of the programs on the federal student aid website, and even see which one would offer you the lowest payment. Here are the options:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Based Repayment
- Income-Contingent Repayment
What all of these programs have in common is that they cap your payment somewhere between 10% and 20% of your discretionary income, and they result in a forgiveness of your remaining balance after 20 or 25 years.
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But can you see the problem with this approach? It’s based on a just-getting-by mentality. When you slow down your payments, you’re acting like it’s going to be impossible (or super hard) to ever pay the loan off. And that’s just not true. People pay their student loans off every day! Instead of looking for ways to pay as little (or as slowly) as possible and living with student loans forever, we say kick them out quick.
3. Service Member Benefits
Military service members may be eligible for several programs that help with student loans. If that’s you, look at these benefits:
- Interest Rate Reductions. You can receive these through either the Servicemembers Civil Relief Act (SCRA) Interest Cap or the Zero Percent Interest for Hostile Areas programs. And you may even qualify for both! In either case, you must be on active duty to qualify.
- Payment Reduction. In certain situations, the HEROES Act Waiver may allow you to extend your general income-based repayment options should they expire.
- Postpone Payments. For federal loans only, the Military Service Deferment allows you to postpone monthly payments while you’re on certain forms of active duty.
- Post-Active Duty Student Deferment. This program only applies if you’ve had to interrupt school due to being called to active duty. If that happens, you’ll be able to defer payments up to 13 months from the end of your active duty service.
- National Guard Duty Mandatory Forbearance. Because some National Guard members don’t qualify for the Military Service Deferment, this measure was created and offers similar benefits.
The same trouble with previous options also applies to these service member programs—they rout around the debt problem instead of attacking it head on. Is that what you learned in boot camp? We didn’t think so! Instead of running from it, why not attack that debt?
4. Deferring Student Loans
There are quite a few circumstances that might get you feeling like you need to take a break from paying on your student loans. And while we don’t recommend doing this if you can possibly avoid it, it’s worth knowing your options. Here are some of the situations that could make you eligible for a deferment:
- Being in rehabilitation training or a graduate fellowship program.
- Going back to school at least half-time. But please don’t enroll in more school if you’re just doing it to avoid student loan payments! And if you do head back, whatever you do, don’t dig into any more debt!
- Actively serving in the Peace Corps.
- Being unemployed or underemployed while seeking full-time work. This one’s worth keeping in mind in tough economic times—a deferment could help you stay afloat until you find steady work.
If any of these circumstances are true for you, you can get a deferment as soon as you show your lender the proof.
Be aware that a deferment will have different impacts on your interest charges depending on what type of loan or loans you have. If you’re granted a deferment on either a subsidized federal loan or a federal Perkins loan, you will not accrue interest while you pause payments. That’s helpful! As for private loans, it’s up to each lender to decide if they’ll continue charging interest in the event of a deferral.
But based on what we’ve already said about other student loan help options, what do you think we’re going to say about deferring? You guessed it—we recommend staying focused on finishing the debt fast!
Student Loan Forbearance
Forbearance is another way to cope if you’re having trouble making ends meet. It’s mainly a way for lenders to help you if you tried to arrange a deferment but didn’t qualify for one. But unlike a deferment, a forbearance won’t be automatically granted in most cases. The lender generally has control over whether or not they grant forbearance, though there are circumstances where it’s mandatory.
And that’s precisely the main issue you need to keep focused on—control. It’s up to you to take control of your money and tell it where to go. Your ability to do that is tied up with how quickly you can become debt-free.
Delinquent or Defaulted Student Loans
If deferment and forbearance are last-ditch student loan strategies we don’t recommend, there’s another outcome that’s even worse: falling into delinquency or defaulting. Delinquency is defined as falling 90 days behind on payments, and it harms your credit score. Going into default happens at different timelines depending on the type of loan or your lender, but with most federal loans this happens after about nine months of nonpayment. Defaulting on your loans will complicate your world in bad ways. Some of the possible woes:
- Having your wages garnished
- Being required to fork over the whole balance immediately
Obviously staying far away from these troubles is best. They’ll only slow you down on your quest to leave debt behind forever. But if you’re already in default on your loans, there are two things you can do to get back on track.
Student Loan Rehabilitation
This is a pretty simple federal program designed to help you keep your Four Walls (food, shelter, utilities and transportation) in place while you slow way down on your school loans. You’ll likely need to show proof of income and expenses and, depending on the numbers, could have your payment drop as low as $5 monthly.2 The goal with rehabilitation is to get out of default by nine payments within 10 consecutive months. If you can achieve that, the default status will be removed from your credit report.
Student Loan Consolidation
The other way to end a default is through student loan consolidation. The word consolidation comes up a lot in the context of debt relief, but we want you to hear one thing loud and clear—student loan consolidation is the only kind we’d ever recommend you consider. And even that kind should be chosen carefully, on a case-by-case basis.
Consolidation is only an option for federal student loans. If you choose to consolidate, your new lender will pay off your old loans resulting in the end of the default. You’ll also have a new loan structure, including a lower payment. But we only recommend consolidating if it doesn’t prolong the life of your loan or raise your interest rate. That’s not the goal here people! Think in terms of clearing debt and building wealth.
Now this is a student loan approach that we can get behind, if and only if it makes sense for you. The basic idea with refinancing is a sound one: You might be able to get a big win by locking in a better fixed interest rate (paying less over time) or a better term (quicker payoff date). Or both! What’s not to love?
But there are several things that must be true before you even think of refinancing. Here’s the deal:
- No application or origination fees. Don’t do this unless you’ve found a lender who charges you absolutely nothing for the service.
- Only a fixed interest rate will do. No variable rates allowed. They have a way of wrecking your budget at the worst possible moments.
- Same or shorter term as the original loan(s). Recall that we’re trying to speed the payoff up, not slow it down.
- Get a better rate. If you’re signing up for more interest, you’re shooting yourself in the foot.
All of those criteria are good common sense. Now here’s one more that might not be as obvious. Don’t fall for the “set-it-and-forget-it” mentality. You know the one we mean? You take the time to get that shiny new refi, and you see it’s guaranteed to end five years sooner than before. That’s good! But it’s just not good enough! Don’t just refinance. Keep throwing everything you have at this thing until it’s a distant memory.
Avoid Student Loan Relief Scams
It’s always good to have a wary eye out for the rip-off artists. They pop up everywhere, and they’re especially eager to prey on people’s financial problems. One of the easiest ways to avoid scams is to be sure you don’t sign up for anything that’s charging you fees. All of the federal programs described above are already available to you for free. And even refinancing is something you can definitely get without paying a dime.
Watch out for “debt settlement” businesses, a term that’s often used inaccurately as a synonym for consolidation. The two are not the same. Debt settlement companies make big promises about helping to reduce or eliminate your debt while charging you big fees up front. But they often take the money and run without bothering to keep any of their promises. If you hear debt settlement, run.
The Best Option for You
Refinancing can be a really good way to get moving faster in the right direction with your student loans. With the right lender, you can get a better interest rate and a shorter term. That’s a win-win. Let’s see if refinancing is the right option for you.