If you’ve lost your job or your hours or gig work has been cut as a consequence of the coronavirus crisis, you’ll understandably want to focus on paying for housing, food and other necessities first. You can help cover the essentials by lowering your student loan payments, either for a short time or indefinitely.
The federal student loan waiver announced by the U.S. Department of Education on March 13 won’t reduce your loan payments now. Instead, it will limit the amount of interest that accrues and could lead to a shorter repayment timeline. But it does make certain federal repayment options a better bet than usual.
One of the most beneficial programs for federal student loan borrowers is income-driven repayment, which ties monthly payments to a borrower’s earnings. It’s the first option you should look into if you have no or limited income, and you’re not sure when your earnings will recover.
You’ll pay 10% to 20% of your discretionary income each month, depending on the plan, and you’ll owe $0 if you have no income. You must recertify your earnings annually to stay eligible.repayment, you’ll get forgiveness on any loan balance that remains after 20 or 25 years of payments. But you’ll have to pay income tax on the forgiven amount, according to the current tax law. If you have a large loan balance and you’re paying very little toward it, that could leave a large amount to forgive at the end of your repayment term. You can view your potential payment, and how much you might get forgiven, using the government’s Loan Simulator tool.
Some of your loans may not qualify. You can’t repay parent PLUS loans, Perkins loans or those from the Federal Family Education Loan program on income-driven repayment. But you can consolidate those loans into a federal direct consolidation loan to make them eligible. (Perkins loans come with their own forgiveness program, particularly for public service employees, so consider leaving Perkins loans out of the consolidation package.)
You’ll have the option to choose your own income-driven plan on the application. There are four options, which each have slightly different features, benefits and drawbacks. But to simplify the process, check the box on the form that states, “I want the income-driven repayment plan with the lowest monthly payment.” You’ll be placed on whichever plan you qualify for that gets you the lowest payment possible.
If you have loans with multiple student loan servicers—the companies that collect payments on behalf of the federal government—you must submit an income-driven repayment plan request form to each servicer. You can find your servicer’s contact information by logging into Federal Student Aid and viewing your loan details.
You don’t have to switch back to your original repayment plan once your income increases again. You can stay on income-driven repayment and continue to update your income as it changes in the future, which will also change your monthly payment.
You can temporarily postpone federal student loan payments using either deferment or forbearance. The option you qualify for depends on your circumstances, but in many cases, you can pause payments for a total of three years over the lifetime of the loan. That’s the case with economic hardship deferment, unemployment deferment and general forbearance.
Typically, interest would continue to accrue during both deferment and forbearance, except for borrowers with subsidized federal loans (on which the government pays the interest during periods of deferment). That accrued interest would get added to your balance at the end of your deferment or forbearance period, increasing the amount you owe.
But the U.S. Department of Education announced on March 13 that federal student loan interest will be waived until further notice. That won’t change borrowers’ monthly payments now, because any money you send to your servicer will instead go to your principal balance. If you sign up for deferment or forbearance temporarily, though, according to the information the Department has released so far, interest won’t accrue retroactive to March 13. That means you can pause payments interest-free for now.
Only sign up for deferment or forbearance if you need it, and consider income-driven repayment instead if you’re worried about loan affordability beyond, say, the next six months. But if you only foresee needing help affording payments, or other bills, in the short term, now is a wise time to consider deferment or forbearance. Get in touch with your student loan servicer to pick the best option for you and sign up.
Contact Your Private Lender
Private student loan borrowers have far fewer options since private lenders aren’t required to offer the same protections that the federal government does. (That’s a big reason why you shouldn’t rush to refinance federal loans right now.) Your ability to pause or lower payments differs greatly depending on your private lender.
Still, many lenders do offer forbearance and other repayment programs, often called loan modification, that can reduce your interest rate or bill. Call your lender and ask about your options, specifically for postponing payments in a way that won’t cause interest to accumulate and be added to your balance later. Some banks that provide student loans also may be offering coronavirus-specific relief.
No matter the type of student loans you have, it’s crucial to let your lender know as soon as you’re unsure you’ll be able to pay your bill. That will help protect you from the consequences of student loan default, which can include ruined credit and withheld wages if you fall behind on federal loans for more than nine months.
Read more:In Coronavirus Economy, Don’t Rush To Refinance Student Loans
The Pros And Cons Of Income-Driven Student Loan Repayment Plans