By Victoria Sechrist (ConsumerCatholic.com)
Part 3 of a 5-Part Series on Student Loans
Temperance is the cardinal virtue that keeps us from giving into our temptations. The biggest temptations with student loans? To stop paying them!
In Part 3 of this five-part series, we’re going to talk about why you should reconsider that temptation and what options you have if you feel like you just can’t pay them!
It can be very tempting to just ignore your student loans and hope they go away. Doing so, however, has different consequences depending on what type of loan you have. With Federal loans, there is no statute of limitations. That means that at any point, the Federal government can sue you for your Federal loans. So even if they go into collections, you can’t just cross your fingers and wait for them to disappear.
The government can take home a slice of your paycheck through a process called wage garnishment if you stop paying your student loans and go into default. That means you would see less in your paycheck! Additionally, the government can withhold your tax refund. So if money is already tight, you don’t want to go down this road.
So what can you do if you’re struggling to make payments? If you’re not already on income-based repayment (IBR), you can apply for that.
However, it’s very important to know that even though an income-driven repayment program will lower your monthly payment, it’ll prolong the time it’ll take for you to pay off your student loans and you’ll end up paying more interest over time. So, I would encourage you not to think of this as a long-term solution!
On IBR, you might even notice that your balance goes up every month. That’s because the monthly payment may not even pay off all of your interest each month. Unfortunately, student loans accrue interest every day. When you make a payment, that money will first go towards interest before taking a bite out of the principal.
For example, let’s say you owe $50,000 in student loans. For the sake of simplicity, let’s say you have one interest rate of 6%. To figure out the daily rate, you divide 6% by 365 days. You get .000164. Multiply that by $50,000 and you get your daily accrual: about $8.22 per day! Over one month, or 30 days, that would be about $246.60 in interest. So if your income-based repayment is only $150 per month, then you’ll see your balance go up every month.
Be Honest With Yourself
Are you struggling with making payments because you’re spending too much on unnecessary shopping or going out too much? Or is it your fixed expenses (rent, utilities, health insurance, other debt repayment, etc.) that leaves you unable to pay your student loans? If it’s because you’re not earning enough, how could you make more money?
Deferment and Forbearance
If you’re already working more than one job and are stressed to the max, you can also consider different types of deferment and forbearance, including economic hardship deferment, unemployment deferment and general forbearance, among others. This allows you to temporarily pause your student loan payments. Interest will still pile on, unfortunately (an exception: if you have subsidized Stafford and subsidized consolidation loans). Again, knowing what kind of student loans you have is important.
You can check your eligibility for these programs on the Federal Student Aid website. However, it may be more beneficial to visit your student loan servicer’s website directly to apply for these programs.
Fed Loans: https://myfedloan.org/borrowers/postponing-payments/deferments-forbearances
Things get a little more murky with private student loans. Each student loan servicer has different policies regarding forbearance, and many don’t offer it at all. So if you fall on hard times, your loan servicer may not be understanding unfortunately. But it’s OK – have hope!
Unlike Federal loans, there is a statute of limitations on private student loans. Each state has different rules, but that doesn’t mean you should purposely default on your private loans and let collection agencies harass you until they legally have to stop. If you default on private loans, the student loan servicer can sue you for your debt (and potentially garnish your wages), and if your account goes to collections, your credit score will take a hit. These are important things to keep in mind if you’re looking to buy a house or refinance other debt. Additionally, you don’t want to give the appearance that you knowingly manipulated the system by defaulting on your loans and hoping that it would fall off your credit report eventually.
One way to lower your private student loan payment is to refinance to a lower rate. This should reduce the amount you pay in interest, as long as the repayment period is the same. For example, if you have 7 years left on your loans and you refinance to a 7-year loan with a lower rate, you’ll save interest. But if you have 7 years left and you refinance to a lower-interest 15-year loan (which would reduce your monthly payment), then you’ll likely end up paying more in interest than if you had just finished the 7-year plan you were on.
If you’re interested in refinancing, you can check out your current loan servicer’s rates, but it would also be prudent (cardinal virtue alert!) to compare other servicers’ rates. Some websites where you can shop around include NerdWallet and StudentLoanHero.
Now, you may remember that in Part #2, we talked about the risks of refinancing from Federal to private. It’s true that right now private student loan interest rates are lower than most Federal loans, but when you refinance, you lose the Federal student loan protections we talked about. So in what cases should you refinance? There’s no easy way to answer this! Something to consider, however, is your balance. If you’re less than $10,000 away from paying down your loans and refinancing could save you money, you might as well consider it. But if you owe $50,000 or more, you might regret refinancing into private loans if you get disabled and would’ve qualified for loan discharge; or, if you lose your job, can’t make your monthly payments and need an income-based program.
Let us pray Sadlier Religion’s Prayer for Temperance:
“Temper my desires, O Lord, and turn my focus towards you. Deliver me from the tendency to go to extremes that strain both body and soul. Help me to be content with what I have instead of constantly seeking more. May I come to recognize the grace of moderation that brings both contentment and appreciation. Let temperance grow in me and lead me to discover other virtues that bring deeper union with you. In your sacred name, I pray. Amen.”
Source: Sadlier Prayer for Temperance