It’s time to repay: how to avoid student loan default

The time is almost here for many new grads to start paying back their student loans. For those who graduated in May, the six-month grace period offered on most federal loans is about to expire.

Worried you can’t afford it? You’re not alone.

The average Class of 2014 graduate who has student loan debt has to pay back about $30,000. Yet many recent grads are finding it difficult to find a job or are working in low-paying positions.

“The real problem when borrowers get out of school is that their income is probably the lowest it’s going to be throughout their lifetime and also their debt is the highest it’s going to be throughout their lifetime,” says Andy Josuweit, the CEO of Student Loan Hero, a website that helps borrowers keep track of loans and suggests repayment options. “So they’re really facing a cash flow issue. They don’t have enough income to pay both their debt payments and standard living costs.”

So many borrowers pay late or miss payments.

More than half of the $1.2 trillion in student loan debt is made up of subsidized and unsubsidized federal Direct student loans. Nearly 20 percent — about $1 of every $5 — of outstanding federal direct student loans is past due, according to a report from the National Consumer Law Center.

The consequences of being delinquent and going into default — failure to make a loan payment for 270 days or more — are severe.

“When a borrower defaults they essentially get 16 to 25 percent of collection costs tacked on to their student loan principal. So the average borrower has $30,000 in student loan debt, you add 16 to 25 percent to that and they’re racking up thousands of dollars in unnecessary costs by defaulting,” Josuweit says.

The key to avoid default is to contact your loan servicer or lender and find out your options. Here are some repayment strategies that may make paying back your loans less painful.

Income-Driven Repayment Plans
Unemployed or underemployed borrowers may be eligible for a variety of income-driven repayment plans to pay back their federal student loans. While the standard plan caps the repayment period at 10 years, these plans let you pay back what you owe over 20 to 25 years – and if you haven’t paid off the entire balance by then, the loan may be forgiven. Also, your loan repayment may be capped at 10 to 15 percent of your discretionary income, depending on the plan. Compared to the standard plan, borrowers may pay more in interest over the life of the loan. But it’s a far better option that default. You can find out more information about income-driven repayment plans at

Deferment or Forebearance
Under certain circumstances, you may be eligible for deferment or forbearance, allowing you to temporarily postpone or reduce your federal student loan payments. During deferment, the repayment of principal and interest on your loan is delayed. You’ll need to request this option from your loan servicer. If you can’t make your loan payments but don’t qualify for deferment, then you may be able to receive forbearance. With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months at a time, though interest will continue to accrue.

Refinance Private Loans
Borrowers with private student loans have fewer options, but can request to extend the term or lower the interest rate to reduce their monthly payments. “Some private financial institutions are willing to lower your interest rate between 3 to 5 percent depending if you do a variable or fixed rate student loan and it could really lower monthly payments and total interest that borrower is going to accrue over the lifetime,” Josuweit says.

Talking to your loan servicer or financial institution to review your options can not only ease your financial strain, it can help you avoid the devastating financial blow of default.

“Ninety percent of the time when we can reach a customer and tell them about their options we can help them avoid default,” says Patricia Christel of Navient, formerly part of Sallie Mae, one of the four major loan servicers for federal student loans. “Of those who do default – 90 percent of the time — we haven’t been able to reach them. So answer the phone to find out about your options.”

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