Navigating Financial Bumps in the Road

Life happens. At some point your financial situation might not be quite what you planned. Whether it’s job loss, medical bills, or unexpected car or home repairs, personal finance can quickly become overwhelming when basic bills become hard to cover.

It can be tempting (and even understandable) to let student loan payments slide when there are larger concerns of keeping a roof over your head and meals on the table. But ignoring your student loans during hard times can come with outsized consequences. Student loans are challenging to get discharged in bankruptcy and you could even have your paycheck garnished if you end up in default — not to mention a substantial decline in your credit score!

Let’s look at some techniques to guard yourself against loan default in the future and to keep you on the road to financial wellbeing, even when that road gets bumpy.

Vehicles need to be well-maintained to prevent breakdowns, and this holds true for finances as well. Prioritizing an emergency fund of three to six months of expenses is highly recommended as an early personal finance goal. An emergency fund reduces the likelihood you’ll need to rely on high interest credit cards or a personal loan when issues arise.

A strong emergency fund also buys time to make alternative arrangements with lenders to reduce the impact of a financial crisis on your credit score.

Many people want to put their loans in the rear view as soon as possible, but in times of financial hardship, it may be necessary to put that goal aside until your financial situation improves. After cutting unnecessary expenses from your budget, take a realistic look at your resources and what you can reasonably afford to pay on your loans each month.

Federal loans typically offer the most flexibility for hardship and have a wide selection of repayment plans. If you are on the standard ten-year repayment term, you could use our free AccessLex Student Loan Calculator to determine what your payments would be on a 25-year repayment term instead.

If your income has gone down and the standard or extended plans prove unaffordable, ask your loan servicer to look at your new earnings as a basis for your loan repayment by filling out an Income-Driven Repayment Certification Form. It is possible you could qualify for as low as a zero-dollar income-driven payment and still remain in good standing on your loan. Just keep in mind that interest will be accruing on the loan. If your calculated income-driven payment is lower than the interest accruing, you could see the total balance of your loans grow over the long-term if you are not using the new REPAYE/SAVE plan.

If you have private student loans, ask your lender about accommodations for making reduced or interest-only payments.

If you truly can’t make any payments on your loans, don’t qualify for a zero-dollar income-driven repayment, and are not in qualifying employment for Public Service Loan Forgiveness, you may want to ask your servicer about a forbearance. This option allows you to pause payments on your loans, but interest still accrues.

Federal loans will allow forbearances for a year at a time and have a maximum limit of three years of forbearance over the life of the loan. Private lenders typically offer a stricter time limit on forbearances. Because of these limits, forbearances should be used sparingly.

Handling student loans during financial hardship can be a challenging task, but doing what you can in times of financial strength and knowing that you have options during the hard times can help the road ahead seem a little less scary.

Next step: Schedule free 30-minute calls with Accredited Financial Counselors from AccessLex Institute through AccessConnex to talk about navigating financial obstacles.