Many of us are annoyed by our student loan balances. It’s frustrating to spend hundreds of dollars each month on old debt for a degree you may or may not be using when you would much rather spend or save that money for something else. We forget that being able to afford our student loan payments is a luxury – many graduates cannot.
In the US, more than 40% of government student loan borrowers are not making payments. This means they are either in default, delinquency or have postponed their payments, usually due to financial hardship. In Canada, 13% of borrowers default on their student loans – but a default only happens after the loan has been in arrears for nine months, which means there’s probably plenty more that are a few months behind but not in trouble yet.
What happens if you can’t make your student loan payments?
Your student loans are a debt obligation just like any other, which means there are severe consequences for missing payments. Missing student loan payments, or only making a partial payment that does not cover your minimum, can negatively impact your credit score. Do this repeatedly, and your loans can go to default, which will further exacerbate the situation.
Once your loan is in default, the government can and will come to collect. They can take from things like your income tax refund, and even pursue legal action to garnish your wages. In other words, you will probably end up paying your student loans, no matter what.
Student loans cannot be discharged in bankruptcy
On both sides of the border, student loans are one of the rare types of debt that cannot be discharged in bankruptcy (at least not immediately) with few very exceptions.
If you’re drowning in debt and eyeing declaring bankruptcy as a way out, it might rid you of your credit cards and personal loans, but your student loans won’t be going anywhere. Declaring bankruptcy will have a long-lasting negative impact on your credit, and you’ll still be stuck with your student loan bill (plus all the interest and fees it incurred in non-payment) at the end of it.
In most cases, the only way to get out of repaying your student loans is death or permanent disability, neither of which is preferable to paying off the balance.
Seek help before you miss a payment
So if you can’t escape paying your student loans but you don’t have the financial resources to do so, what can you do?
If you’re facing financial hardship and cannot make your student loan payments, it’s best to notify the government sooner rather than later. Remember, when it comes to any debt, your creditor wants to be paid, and they will work with you to make that happen.
In Canada, you can’t apply for relief or assistance programs once you’re 90 days behind in payments, which is why it makes it imperative that you let the government know right away if you can’t meet your debt obligations. You know what day of the month your student loan payments are withdrawn from your bank account. If there’s not going to be any money in there, tell them before the cheque bounces.
Different types of repayment relief available in the US & Canada
There are a few forms of student loan repayment relief and assistance available, depending on where you live, what type of loan you borrowed, and what your circumstances are. Below are some of the options available:
Repayment Assistance Plan (RAP). In Canada, if you are single with no dependents and earn less than $25,000 per year, you do not have to make payments on your student loans. You can apply for repayment assistance, which will suspend the required payments on your debts for 6 months. Enrolment is not automatic, so you will need to re-apply at the end of 6 months if you still require relief. Even though you are not required to make payments on your student loans during this time, they will continue to incur interest. You can be granted up to 10 years (60 months) of repayment assistance, at which time the government will chip in to help cover your payments and interest until your loan is paid off by the time you hit 15 years. It might seem nice for the government to pick up the tab if you simply wait long enough, but it’s never a good thing to be earning less than $25,000 for 15 years since graduating. You can apply for the Repayment Assistance Plan online, directly through your student loan provider.
Deferment. Deferment is typically available for US student loans. In deferment, you do not have to make payments on your student loans for a certain period. To be granted a deferment, you must be experiencing economic hardship, unemployed, or returning to school. To apply for deferment, contact your student loan provider.
Forbearance. If you are unable to qualify for a deferment, you may be able to delay making payments on your student loans by applying for forbearance. Like the Repayment Assistance program for Canadian student loans, you can qualify for forbearance if you are unable to make your student loan payments due to economic hardship. Loan forbearances are typically granted for one year at a time, and you may still be able to get one even if you have defaulted on your student loans. To apply for forbearance, contact your student loan provider.
Loan Forgiveness. Sometimes student loan forgiveness is available to graduates working in a specific industry, job, or geographic location. For example, doctors or nurses working in remote or rural areas are eligible for up to $40,000 of loan forgiveness over five years. In the US, those working in a public service, government or non-profit job are eligible for the Public Service Loan Forgiveness Program. Student loan forgiveness is very rare, so if you qualify for one these options, definitely take advantage.
Final thoughts on repaying your student loans
It’s not easy to pay off debt, but it’s much harder to live with the consequences of not doing so. Work hard and make the necessary sacrifices it takes to pay off your debts as soon as possible, so you don’t find yourself in a situation where you cannot meet your obligations. However, if there does come a time when you cannot pay your loans, contact your creditors immediately and take advantage of the options available to you. Your goal is not to avoid repayment; it’s to avoid default and get to debt-free with your credit score in tact.