Can’t Afford Your Student Loans? This Can Help

Students throw their caps in the air ahead of their graduation ceremony at the Royal Festival Hall on July 15, 2014 in London, England. Students of the London College of Fashion, Management and Science and Media and Communication attended their graduation ceremony at the Royal Festival Hall today. (Photo by Dan Kitwood/Getty Images)

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If you are just getting started in your career, or you recently left grad school with a big student loan balance, keeping up with a large student loan payment can be a major headache. The government, which now issues 94% of all student loans, understands this and has created several programs that can help you tie your student loan payment to your income so you don’t have to stretch to make the payment every month.

Income-driven repayment plans

Federal Student Aid (FSA) calls the broad range of programs that tie your student loan payment to your income “Income-Driven Repayment Plans.” There are three plans, which differ in the payment amount and calculation method. The simple difference is the percentage of your monthly paycheck that will be earmarked for loan payments.

These plans tie your monthly student loan payment to a percentage of your monthly income, and they are called Income-Contingent Repayment (20%), Income-Based Repayment (15%), and Pay As You Earn (10%). To apply for these plans, you need to either contact your student loan servicer to request moving to one of these plans or apply directly on the FSA site.

It’s important to note that repaying your loan on an income-driven repayment plan will increase the total amount you pay over time on your loan, since you are paying less per month and the loan generates interest. Additionally, the government will “forgive” any remaining balance on loans repaid under Income-Based Repayment and Pay As You Earn after 25 and 20 years, respectively; however, this “forgiven” amount will be treated as taxable income.

What if I have no income or I’m unemployed?

You still have options to tie your monthly student loan payment to your income even if you are unemployed. If you had income in the previous year, you won’t be able to receive a $0 Income-Driven Repayment payment, but you can request a deferment on your student loans while you look for work.

A deferment is basically a “free period” on payments that does not generate negative financial consequences like credit score report issues or late fees. In cases of deferment, interest will still accrue on your loans during the time of deferment, but you won’t miss any payments. You will not see any interest accrue, however, if you have federal “Subsidized Stafford Loans” that don’t accrue interest during these periods. You can receive a deferment for military service, going back to school, medical hardships, or economic hardships.

Deferments have a three-year total usage limit in most cases, after which forbearance is your only option to suspend payments. Both deferments and forbearances must be requested from your student loan servicer, so contact the servicer if you don’t have income and need to adjust your student loan payment.

What if I don’t qualify for income-driven repayment?

If you don’t qualify for an income-driven repayment plan due to your income level, but you are still struggling to make payments, you can explore the federal consolidation loan, which can extend your repayment horizon by up to 30 years (based on the amount you owe) and therefore reduce your monthly obligation. The resulting payment will likely be closer to what your income level can support, especially if you are having to make large unexpected payments, which aren’t considered in income-driven repayment plan calculations.