What to Do When You're Struggling to Pay Off Your Loans


As if submitting hefty student loan payments every month wasn’t bummer enough, consider this: A new Brookings Institution analysis suggests nearly 40 percent of borrowers could default on their student debt by 2023.

That can wreak havoc on an already tough financial situation, potentially resulting in wage garnishment, loss of tax refunds and collection fees, says attorney Joshua Cohen, who specializes in student loans. At the very least, getting behind on loan payments can damage your credit score, hurting your chances at qualifying later for affordable loans.

Of course, defaulting doesn’t happen overnight—and at each step of the way, there are opportunities to reverse course.

If you miss one payment…

Get back in the game ASAP. “Missing a single [federal loan] payment isn’t the end of the world, and is easy to fix,” Cohen says. You can either make it up or request a forbearance or deferment, allowing you to temporarily stop or reduce your payments. Often the forbearance or deferment will backdate to erase the missed payment, he says.

If the late payment already dinged your credit score, ask your lender for a “goodwill adjustment” to remove the blemish from your report.

Technically, private loans can default after just one blown payment, but many lenders don’t move that efficiently. Contact them ASAP to discuss your options.

If you’ve fallen behind and can’t catch up…

If you’ve had a deep financial setback, apply for deferment or forbearance first, which can offer a few years’ break. “Stopping or reducing your payments may provide enough relief to help you avoid default,” says Freddie Huynh, VP of credit risk analytics at Freedom Financial Network.

If circumstances persist—say, you were laid off and haven’t identified any prospects—federal-loan borrowers can revise their repayment plan. “Call your servicer and request income-driven repayment based on zero income,” Cohen says—which will result in a payment of zero dollars.

Unfortunately, most private loan servicers don’t offer such flexible payment arrangements, but it’s worth asking, or consider refinancing for a more affordable bill.

When the situation is really dire…

If your situation has graduated from bad to worse, you still have a few options. Federal loans don’t default until payments are 270 days (or nine months) past due, and they offer several get-back-on-track plans, including loan rehabilitation and loan consolidation. In some cases, including permanent disability, federal loans can be forgiven or cancelled.

Private loans are stricter. Once they are 120 to 180 days past due, they may be “charged off,” meaning the lender considers the debt a loss. That does not mean you don’t have to pay it back, though. It goes to a debt collector, and is noted on your credit report.

In truly dire situations, when you have additional, non-student-loan debts, bankruptcy may help by discharging other debts and freeing up cash for student loan payments. But this should be a last resort. Hyunh recommends first looking into consumer credit counseling.