Student loans are no joke. In the United States, student debt is growing at a rate of over $2,000 per second. A YouTube viewer asked me to dig into federal student loan repayment options, so in this video, I do just that. Here are a few things I discuss.
What Happens When you Don’t Pay Your Loan?
If you just stop paying your student loan altogether, it will go into default — something you’d want to avoid as much as possible for two main reasons. First, when you go into default, it stays on your credit report for seven years. It will come back to haunt you if you’re ever in the market to buy a house, a car, or even rent an apartment. Bad credit can even make your monthly bills higher.
Second, when you go into default on a federal student loan, you lose all your relief options. Here are a few of those options and more.
Income-Based Repayment Plans
If you can’t afford to pay back your student loan, you may be able to change your payment plan. There are several different types of federal income-based repayment plans, and they all have small, subtle differences in their terms. Generally, though, the idea is the same: you get a new, lower student loan payment based on your income. So if you’re paying $166 a month for 10 years on your current plan, under income-based repayment you might pay $80 for the next 25 years. Of course, this stretches out the life of your loan, which means you’ll pay more in interest.
Deferment and Forbearance
Your second option: deferment or forbearance. These two options are similar but they have an important difference. With both deferment and forbearance, you postpone your loan for a certain amount of time. If you lose your job or something, either option will allow you to postpone your loan for a certain amount of time. This way, you get a little break until you get back on your feet. With deferment, though, your interest is postponed too. With forbearance, you are on the hook for interest — it still accrues during the time your loan is postponed.
Student Loan Forgiveness Programs
For very specific scenarios, the government offers some public student loan forgiveness programs. They’re not very common, but if you work for a nonprofit, you’ve been in the military, or your college closed, you may qualify. There are also certain states and cities that offer forgiveness as an incentive if you move there. These options probably aren’t realistic for most people, but it’s worth mentioning.
There is one drawback to student loan forgiveness, though: in some cases, you’re on the hook for taxes. For example, if $5,000.00 of your loan is forgiven, you’re on the hook to pay income taxes for that $5,000.00 — it’s considered taxable income. It’s something to be aware of if any part of your debt is forgiven.
Volunteering
I’ve only heard about this option in recent years, but I might have tried it when I was paying off my own loan because it sounds kind of fun.
Sites like SponsorChange.Org connect sponsors with student loan borrowers who are willing to complete volunteer work with an organization or in their community. It seems like an excellent way to pay back your loan, contribute to something positive, and get a bit of volunteering experience under your belt.
Debt Payoff as an Employee Perk
Some jobs are now offering student loan repayment as an employee perk, the same way you might get a 401(k) benefit or company stock. It seems like an increasingly popular option, so it’s something to keep in mind if you’re looking for a new job or maybe you can just try to squeeze that into the negotiation process. Every company is different, but it might be worth a try.
Check out the full video, which includes more info on each option. Again, not all of these are realistic for everybody, but it doesn’t hurt to know what’s out there.
Managing your money is like going to the dentist or standing in line at the DMV. Nobody wants to do it, but at some point, it’s inevitable: you need to clean your teeth, renew your license, and manage your money like a grown-up.
I’d never heard of volunteering to help with student loan payoff before now, I’ll definitely look into it!
Seemed like a fun idea!
Good post Kristin!
I was fortunate enough to be a spoiled brat so my parents paid for my college. Posts like these scare me as a father and encourages me to save more in my daughter’s 529 Plan so she doesn’t have to pull out loans. I’ll definitely be aware of options like these when the time comes! Which is like 16 years away. But ya know, as a father you worry about EVERYTHING.
It’s good to get a head start on stuff like this!
If you qualify for Public Service Loan Forgiveness, the forgiven portion of your loan is NOT taxable, according to studentaid.gov.
The 10-year public service loan forgiveness is not taxable under section 108(f) of the Internal Revenue Code because the forgiveness is restricted to borrowers who work in specific occupations.
That’s true–and thanks for pointing out. Not all forgiveness is considered taxable income.
Just read you article. My son will be going to medical school in 2 years. While we will not have any school loans until then, we will have them then. Could you perhaps do an article on getting school loan as this will be new territory for us.
How to navigate the student loan or financial aid process? Yes, that’s a great idea for an article! I’ll put it on the list.
Hi Carla,
Coming across your comment I wanted to pass along this resource. It’s geared toward the repayment process afterward, but it’s good to understand his options now so he can make plans for the future: https://studentloanhero.com/featured/ultimate-student-loan-repayment-guide-for-doctors/.
If you have any other questions, don’t hesitate to reach out.
Thanks,
Jaclyn
PS. Great article, Kristin!