When we find ourselves in debt it’s easy to turn away and hope that everything will work out okay in the end. But the harsh reality is that not paying off debts can have serious consequences to our future. Holding on to credit card debt, for example, will make it harder to get credit in the future. That means a serious squeeze to the amount of credit cards, loans and mortgages available to you. Not paying back your student loans can have an even worse effect on your future, as well as putting additional strain on your life at the moment. Some of the possibilities facing those who don’t pay back their debt include:
- The IRS could choose to garnish your salary or take away your tax return altogether.
- Losing your drivers’ licence.
- Losing an occupational licence, such as those required by doctors, nurses and teachers.
But why allow these horrors to become a reality? With careful planning and frugal spending you will soon see the light at the end of the tunnel. Let’s take a look at what your different debt repayment options are.
What to do if you can’t pay back your student loan
Regardless of your current circumstances, it is best to research what debt repayment options are available to you. Look to see what government student loan forgiveness options and employer contribution plans are available to you. If these don’t help, apply for a new repayment option on your student loan to reduce your monthly payment amount. Plans available include the Income-Based Repayment, which is a set rate of 15 per cent of your monthly income. Federal Student Aid, part of the US Department of Education, has advice on the different debt repayment options open to those looking to pay off their student loan.
Depending on your profession, you may find that different debt repayment options are available to you. For example, some teachers can apply for the Teacher Loan Forgiveness Program, meaning that if they stay in their profession for at least five years then a portion of their student loan will be written off. (This depends on the type of loans that you initially took out.)
If you have more than one student loan you can choose to consolidate them into one direct consolidation loan. This can simplify the repayment process so that you only have one monthly payment to make. However, make sure that the rates are suitable for you so that you don’t end up pay more than you were previously.
One of the debt repayment options available is to defer your payments for a limited time, giving you some freedom to concentrate on other debts that need to be tackled first. Loan deferment isn’t available for everyone, and you may still have to pay interest whilst the loan is on hold, so make sure that you get all of the necessary information when applying for deferment.
If you aren’t able to defer your loan you may be able to apply for forbearance. This is similar, but with forbearance the payments may only be reduced rather than stopped completely. Forbearance is available for those in certain professions such as if you are serving in a medical internship.
Choosing between your debts
It’s a difficult decision to make – which debts should you pay off first? You may think that it makes sense to pay off the lower balances first. However, this means that you’re still earning a higher level of interest on other debts, so make sure that you put money towards the debt with the highest rate first.
If you only have enough money to pay back either your student loan or your credit cards, pay off the credit cards. Regardless of what happens, the bank will still expect these to be paid, whereas you can apply for deferment or forbearance on your student loan if you need it. If possible, pay off your credit card balances in full each month.
Take some time out to plan your finances according to your lifestyle. For example, many people make the mistake of setting their student loan repayment date just before they receive their salary. Make sure that you update this so that the money is in the bank when it’s needed.
Where to go to when you need help
If you feel like the debts are continuously stacking up and you can’t escape from them, consider speaking to an expert such as a financial advisor so that you can get some personalised advice on what debt repayment options are open to you. There are also numerous student loan experts and bankers who will help you work through your financial difficulties. Speak to your bank or credit union, your employer and the government department that financed your student loan. Remember that you’re not the only person to have encountered financial difficulties, so there are plenty of debt repayment options already in place that could make your life a lot less stressful.