Lots of debt and no income?  You’ve still got options

This is the second guest post from Radhika Singh Miller, who serves as program manager of educational debt relief and outreach at Equal Justice Works. Last week’s post looked at Income-Based Repayment options, while this week’s post explores options for avoiding default should you find yourself without any income at all (either before or after law school). I’m grateful to Equal Justice Works for providing these guest posts to help you begin to learn about your repayment options well in advance.

In this economy, more and more students are facing the possibility of being unemployed after graduation.  When your six month grace period on student loans ends and your monthly payments begin, what do you do if you are unable to afford the payments?  For those struggling to find employment, don’t fear, there are options available for you to avoid default.  Here are some tips for those entering repayment who aren’t able to shoulder the financial burden just yet.

First and foremost, grab the bull by the horns and figure out exactly what you’re facing.  Make a list of all your student loans and how much you owe.  Federal loans can be found in the National Student Loan Data System and private loans will show up on your credit report.  By law, you are entitled to a free copy of your credit report once a year.  Make sure your loan servicers have your current information and be sure to keep them informed of any name or address changes – payments are still due even if you don’t receive an invoice!

If you cannot afford to make payments on your loans, talk to your servicer now.  Do not miss your payments! If you are behind on payments, you are delinquent on your loans. If you are delinquent for a period of time, you will go into default. For federal loans, default is usually declared after nine months of delinquency. But for private loans, you could be in default as soon as you miss a payment.

If you default on your federal loans, the government can seize tax refunds, garnish your wages and take a portion of Social Security payments – without a court order. You are also in jeopardy of losing your professional license and eligibility for new loans and grants.  Private lenders’ collection powers are not as strong, but this is still debt you owe. If you default on either your private or federal loans, it affects your credit and could prevent you from securing a credit card, mortgage, apartment or job.

You may be able to postpone repayment on your federal loans through deferment or forbearance, but you will lose these rights if you default first, so be proactive about your situation.

Deferments are temporary suspensions of payments that are available if you reenroll in school, are unemployed or facing economic hardship. Deferments also are available in instances of disability, certain military service and for a period following active military duty.

Forbearances are temporary postponements or reductions of payments because of financial hardship. You may be able to receive forbearance if you’re not eligible for deferment. The main distinction is that interest does not accrue on subsidized Stafford loans or Perkins loans (but will on any unsubsidized loans) during periods of deferment but accrues on all your loans during forbearance.

There are no standard entitlements on private loans, but you still need to call your servicer. You may be able to negotiate a short-term forbearance or lower your payment amount. Ignoring the problem will not help; you do not want to default.

Before you seek deferment or forbearance, however, figure out which repayment plans are available. If you can afford it, making some payments is better than making no payments. Federal loans have options that may reduce your monthly payment amounts and make them affordable. Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) can lower your payments based on your income. IBR generally will be better for most people, but do some calculations to make sure. These plans also extend your repayment period and will increase the total amount you will pay since you’ll accrue (and pay) interest over a longer period.

Consolidating your loans also may help because you’ll only have one payment on those loans. Avoid consolidating federal loans with private loans though, because you will lose the federal protections and repayment options. Your interest rate also may change so check to see if you actually are getting a better deal with consolidation.

Finally, consider switching plans if you find your payments are too expensive. Changing to an extended repayment plan or an income-based plan like IBR or ICR may help decrease your payments. You can always switch back or make additional payments (there is no prepayment penalty on federal loans but double-check the terms of your private loans) if your income increases.

Repaying loans is not fun, but it must be done. If you’re having difficulties making payments, be proactive about your situation and seek out options that can help. Visit the Educational Debt Relief section of our website and register for a free informational webinar to learn more.