America is in the midst of a student loan crisis. There is $ 1.56 trillion in total US student loan debt, with over 44.7 millions of Americans contributing to that number.
This national problem is due in part to people’s lack of knowledge concerning their finance decisions while in college. In a recent survey by Student Loan Hero, they concluded that, “More than one-half of our survey respondents, for instance, didn’t realize interest accrues on their federal unsubsidized loans while they’re in school” and “nearly 1 out of 10 borrowers are under the false impression that you don’t need to repay your loans if you can’t find a job after college.”
This lack of knowledge over the course of the lending process can lead to what is known as student loan hardship. This article will cover all the basics of student loans, hardships, and solutions, so that you are well equipped and informed in deciding which option is best for you. It may seem to some that there is no hopeful end in sight, but there always is.
What Are Student Loans?
College is expensive and the price for attending is growing steadily. The purpose of a student loan is to help provide funds for tuition, room and board, and books at a low interest rate. There are 3 main types of student loans; they are important to know as there are differentiations between the corresponding debt relief.
1) Federal Student Loans
Federal student loans are those given by the government. Their amount and the interest rate is also determined by the government. Applications for federal student loans are through a FAFSA (Free Application for Federal Student Aid) form. The standard plan of repayment after receiving a federal loan is by paying a certain amount of your debt and the interest per month, for up to 10 years. To see an estimate of what your payment would look like, you can use the US Department of Education’s calculator. Should it be needed, federal student loans are more likely to provide relief compared to private loans.
Subsidized vs. Unsubsidized Federal Loans
There are two major distinctions between federal loans, subsidized or unsubsidized. Subsidized federal loans are loan given by the government, but for financial reasons. While unsubsidized federal loans are those given by the government as additional aid for paying for college expenses. These two distinctions are important to know because repayment plans and interest are dependent on these factors.
2) Federal Parent Loans
Although this may seem a bit confusing at first, these types of loans are exactly what they sound like. Federal parent loans, also known as PLUS loans, are unsubsidized loans given by the government to parents of dependent college students as well as graduate students. These are granted through application and have the same repayment plan options. However, PLUS loans have a fixed interest rate of 7.9%.
3) Private Student Loans
Private student loans are straightforward. They are loans offered by banks or credit unions. They are not at all connected to the federal government or colleges. As previously stated, it is easier to receive relief with federal student loans compared to private student loans.
All three of these loans have their own respective repayment plans. Where many people find themselves lost is knowing what happens if you fall behind or are unable to keep up with your repayment plan.
Student Loan Hardship
Student loan hardship is the technical term for when you are behind on your payments for your student loans.
There are potential consequences to not paying your debts. A default on a student loan occurs when you do not make a payment for your student loans in more than 270 days. If this happens, you lose your eligibility for further federal student aid and may face legal consequences.
This is worrisome. However, depending on the extent of your hardship, you may apply for some form of debt relief.
First and foremost, the first step if you find yourself unable to keep up with your payments is to contact your lender. Being open and acknowledging your situation to your loan servicer is the first step you can take in finding a solution. By contacting your lender, you can learn of the variety of options that are available to you.
Finding A Short Term Solution
Sometimes it can be hard, especially if you have just finished college and are searching for a job, to make enough money to keep up with your payments. In these cases it is best to find a short term solution.
Through application, deferment temporarily places a stop on your monthly payments for a certain amount of time, lasting up to 5 years. Deferment is for subsidized loans, meaning that during the period of deferment you are not responsible for the interest that would otherwise accrue during that time. Reasons for deferment can include unemployment, maternity leave, medical leave, or disability.
Forbearance is very similar to deferment except that it applies to those with unsubsidized loans. This means that you are still responsible for the interest that acquires during this period. Forbearance can only last for up to a 3 year period and the reasons for forbearance are similar to those of deferment.
You can learn more about the qualification for deferment or forbearance here.
Finding a Long Term Solution
If you see yourself as being unable to make your payments in the long term scope, there are still options for you.
1) Income Driven Repayment Plan (IBR)
If your debt payments are much higher in comparison to your income, you may want to consider switching to an income driven repayment plan. With this option, your monthly payments are calculated as a percentage of your income, typically over a 20 year plan. Your payments can be adjusted monthly according to both your income and family size. You must recertify your plan every year to determine, among other reasons, whether this option is still the best for you. To see whether this option is best for you right now, you can use the same Department of Education’s calculator which factors in all federal student loan repayment plans to compare your options and suggest what is best for you.
2) Student Loan Forgiveness
Student loan forgiveness is only granted in certain cases. If granted, a part or all of your student debt is forgiven. Professions that commonly qualify include those in emergency response work, federal jobs, education, social work, public health, military, and volunteer work.
Less than 1% of people who file for student loan bankruptcy are discharged from their debt. The reason it is so difficult is that in order to qualify you need to prove “undue hardship”. In other words, you need to prove that you will be unable to pay your debts in the foreseeable future while also maintaining a healthy standard of living. Nevertheless, the option still exists for some.
Everyone who receives student loans are faced with having to repay them. Some are able, some are not. Regardless, there are plenty of options that can lead you to finding a solution for your student loan debt.