How to Pay Off Student Loans When You're Totally Out of Luck

<b class="credit">Corbis, Jamie Grill</b>
Corbis, Jamie Grill

America is in full-on student loan damage control mode. Faced with a $1 trillion student debt hole and college graduates entering the job market already $27,000 in the red, lawmakers are butting heads over the right way to give borrowers some much-needed relief.

But for anyone out there who is struggling to make payments on their loans today, chances are that help will be too little, too late.

Maybe you're out of a job, aren't earning enough, or simply don't know where to begin. What do you do if you can't pay back your loans? Here's a guide:

If You're Not In Default Yet, But You're Struggling To Make Payments ...

First Things First –– Tell Your Lender

As much as we love to hate them, lenders are not always the enemy. They can help you, but only if you are communicative and tell them from the get-go that you're going to have trouble meeting the terms of your loan repayment plan.

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The worst thing you can do is throw your hands in the air and see what happens.

The longer you ignore student debt, the worse your life will be, plain and simple. Debt collectors have only gotten more aggressive since the recession, and on top of harassing phone calls, your credit will get dragged through the mud.

Not sure who your lender is? Search for them here:

Defer Payments

Federal student loan borrowers automatically get a six-month grace period to start paying off their loans. After that, you can apply for deferment through your lender. There are several ways to qualify, including unemployment, military service, grad school attendance, or if you are still pursuing a degree part-time, among others.

Deferring your loan means you won't be on the hook for payments for a temporary time period, but, unfortunately, any interest charges will still be applied –– and trust us, compounding interest is a friend to no one. Deferment is a great option if you're struggling to get a start on paying back your loans, but it's not a permanent solution by any means.

How to apply: Find your loan servicer at and apply.


If you're not qualified for deferment, forbearance is another option. It can last up to 12 months, during which time you'll be off the hook for payments but will still accrue interest on your loan. In order to qualify, you must be facing financial hardship, for example, having expenses resulting from a serious illness.

How to apply:Find your loan servicer at and apply. Sometimes, they'll ask for supporting documents to back up your claim.

Income-Based Repayment

There are plenty of reasons to take out federal loans in lieu of private student loans, but the Income-Based Repayment plan takes the cake. For most borrowers, IBR payments are capped at 15% of their income. Recently, President Obama signed an order to reduce IBR payments to 10% of income for borrowers who took out loans after October 2011.

The best part? If you are enrolled in IBR for 25 years, any remaining balance will be erased. Plus, public service workers can apply for loan forgiveness if they are enrolled in IBR.

How to apply: Find your loan servicer at and apply.

If You've Already Missed Payments And Are In Default ...

Loan Consolidation

If you have defaulted on your federal student loan (generally, missing payments for more than 90 days), you will probably already have been contacted by debt collectors. At that point, you might consider consolidating your debt. That means they'll combine your balances and reissue your loan under a new repayment plan (be wary of fees, though). How to apply: Request a consolidation application from your debt collector or you may apply for a new direct consolidation loan with the U.S. Department of Education.

Loan Rehabilitation If you're in default on your loan and consolidating doesn't sound appealing, think about a rehabilitation plan. Your lender will set up a payment based on your financial situation. Once you pay consecutively for nine months, it's like getting a clean slate. They scrub your defaulted status off your credit history, any wage or tax refund garnishments will end, and you may be eligible for deferment and forbearance again.

How to apply: Contact your debt collector and request this option. If they give you any grief and you still think you qualify for one of these options, ask to speak with their Special Assistance Unit. If that doesn't work, file a complaint with the Federal Student Aid Ombudsman Group at the U.S. Department of Education.

If You Have Private Loans That You Can't Repay ...

Unfortunately, none of the aforementioned options are available to consumers who have private loans. Dealing with private lenders is never ideal, especially if you have defaulted on your loans. Not only are they notorious for aggressive debt collections practices, but they have next to no standard flexible repayment options for borrowers facing financial hardships.

Your best bet is to dig your heels in and face the debt collectors head on. If you ignore their calls, they will eventually take legal action and with a court order, they can begin garnishing your wages.

There may not be an official repayment plan offered to people who can't pay, but at the end of the day, debt collectors and lenders are after one thing: money. If you try to negotiate a repayment plan with them or offer to settle your debt for a lower sum, you may get somewhere. Keep in mind, settling debts usually means forking over a lump sum within hours of sealing the deal.

Whatever you do, keep a record of all letters and phone calls you receive. If any collector is particularly aggressive or threatening, you can pursue action against them through your state's Attorney General's office or by filing a complaint with the Consumer Financial Protection Bureau.

The bottom line: Action is better than inaction. As much as the student loan situation in the U.S. could use an overhaul, there's little to gain by waiting for lawmakers to throw you a bone. At the end of the day, loans are tied to your name (and whoever co-signed them) and the longer you wait to take action, the worse off you'll be in the long run.

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