4 ways to avoid default and manage your student loans

Personal Finance Reporter
Yahoo Finance

Student loan debt is an escalating problem with no immediate solution in site. With 45 million borrowers owing a collective $1.5 trillion in student loans, tackling such a task may seem impossible.

But Yahoo Finance is here to help. We partnered with HuffPost reporters Casey Bond and Michael Hobbes, as well as money expert and Journey to Launch host, Jamila Souffrant, to answer your questions about student loans and help you find a solution for your financial future.

The big picture: How we got here  

Hobbes, who has reported extensively on millennial issues, says it’s important to think of how unprecedented our student debt burden is.

“Since the 1960s, tuition has gone up between 400% and 1,200% depending on the kind of university you go to,” Hobbes says. “At the same time, health care and housing have also gotten more expensive and wages have stagnated. It’s harder for young people than it ever was before.”

Loan balances have affected millennials when it comes to their major life decisions as well, Hobbes says. More than 50% of millennials say they’ve put off buying a home, getting married, or having kids because of their student debt.

Default and bankruptcy

If you are missing payments and feeling overwhelmed with debt, bankruptcy is not an option for student loans (at least for now).  

“You have to be able to prove in court that you can’t maintain a standard of living while paying your loans for the foreseeable future. For most people, that’s probably not the truth,” says Bond.

A worst-case scenario for student loan debt would be to go into default, which means missing so many payments that your loan is turned over to a collections agency, who can eventually garnish your wages and even your tax refunds to pay off those loans. This will also affect your credit score and hurt you throughout your financial life.

Both Souffrant and Bond recommend calling your lender and explaining you might have to default on your loans. Because a lender wants to recoup as much of the loan as possible, they will be more eager to work with you to find a solution.

“It’s a long, hard road, but if you do find yourself in that situation, there is likely a solution,” Bond says.

Know your options: Deferment and forbearance

There are ways to pause your federal student loan payments, which can help you avoid the more dire consequences of missing payments.

Deferment means pausing your federal student loan payments, though you’re still responsible for paying off the interest if you have unsubsidized federal loans. If your loans are subsidized, the government will pay the interest for you. You can defer your loans up to three years.

Forbearance delays your payments for just one year, and you’re responsible for the interest no matter what. You can see if your loans are eligible for deferment or forbearance through the Department of Education.

Refinancing vs. consolidation

When it comes to student loans, many people expressed concern over mounting interest fees and how to tackle paying multiple loans off. Bond explained that consolidation and refinancing could be an option.

“The two terms are often used interchangeably but [refinancing and consolidating] are two very different things,” Bond said.

Federal loans can be consolidated, which means combining all of your loans into one with a weighted average interest rate, Bond said. Consolidation won’t help you pay off your loans any faster or lessen your loan amount, but it can make you eligible for income-based repayment plans.

Refinancing means taking a brand new loan out with a personal lender, and using that loan to pay off all of your other loans. This option can help you secure a lower interest rate, and shorten the loan term, Bond said. But beware: If you plan to refinance your federal student loans, you will lose the federal benefits, like lower interest rates and loan forgiveness. Weigh your options carefully.

Loan forgiveness and income repayment plans

There are programs available that forgive your loans or help you adjust your payments to fit your financial situation, explained Souffrant. As long as you make qualified payments over the course of 10 years for the Public Service Loan Forgiveness Program, your loan balance will be forgiven.

For teachers, the Teacher Loan Forgiveness Program will forgive loans after five years. If you don’t work in public service, there are income-based repayment plans that can stretch out the term of your loan to up to 25 years (and remember that would mean you end up paying more in interest.)

Remember: late payments are not missed payments. As long as you keep your loans current, you’ll remain eligible for income-based repayment plans and forgiveness programs.

More you can do

While your situation may seem dire, remember, you’re not alone.

“Mostly everyone graduates with student loan debt, and there are tons of free resources available for you,” Souffrant says. Research the student loan ombudsman in your state, who can connect you with resources to help you tackle your loans.

And for those still in high school, Souffrant recommends having conversations before you even choose a college to set expectations and prepare.

“Having those conscious conversations and talking about what it’s really going to cost, as well as the impact after graduation, that’s important,” Souffrant says.

Student loans are confusing and being in debt royally sucks — and we here at Yahoo Finance want to help #SLAYYOURDEBT. Throughout the month of June, we’ll randomly select winners and award $100 and $500 Amex/Visa Gift Cards to help eliminate your debt and conquer your finances. Visit bitly.com/yfsweepstakes to learn more and enter. Winners will be announced every Friday.

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