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How to Manage Student Loan Debt Without Making It Worse

When you’re struggling financially, keeping up with your student loan payments might feel like you’re stuck on a runaway train — and student loan forbearance, which allows you to pause these payments temporarily, might look like a soft landing. But watch out: Although forbearance is undeniably quick and easy to set up, its high costs can leave you hurting.

new NerdWallet survey, conducted online by The Harris Poll, found that two-thirds of Americans (66%) don’t know that interest continues to accrue at the regular rate when federal student loans are in forbearance. That interest adds up fast: NerdWallet’s analysis shows that if borrowers currently in forbearance kept their balance there for 12 months without making interest payments, they’d add an average of $2,199 in interest charges to their debt, assuming the current 5.05% fixed interest rate for direct subsidized and unsubsidized loans for undergraduates and a balance of $43,538. (Among student loan recipients with federally managed student loans in forbearance during the third quarter of 2018, borrowers carried this amount in forbearance on average.) At the end of the forbearance period, those interest charges could drive up monthly payments, making a bad situation worse.

Forbearance might seem like an appealing option because it’s simple to set up; putting loans into general forbearance can be done with just a phone call. In some cases, schools even recommend it to borrowers who are falling behind on payments. But often, it’s not your best option. Here’s what you can do instead.

Consider deferment for subsidized loans

Forbearance has a lot in common with deferment: Both allow you to hit the brakes on student loan payments for a time. The main difference: Subsidized loans and Perkins loans don’t accrue interest in deferment. (Unsubsidized loans do.)

For subsidized loans, or federal loans awarded based on financial need, “I would definitely recommend exhausting any deferment periods first,” says Colleen Campbell, associate director of postsecondary education at the Center for American Progress, a public policy research organization. You’ll need to meet eligibility requirements to get a deferment, though; that’s not the case with forbearance, which you can often get for almost any reason.

Typically, you’ll have to file paperwork with your loan servicer to show you’re eligible for deferment. But that shouldn’t deter you from applying.

Another benefit: If you qualify for deferment, you can keep that more flexible forbearance option in your back pocket, in case you’re ever in a more pressing financial bind and need quick relief.

Low income? Try an income-driven repayment plan

For borrowers who aren’t making enough money to cover student loan payments, setting up an income-driven repayment plan could be a smart move. Consider the Revised Pay As You Earn plan, or REPAYE, which doesn’t come with any income requirements. With this plan, which requires you to recertify your income and family size each year:

  • Your required payment will generally be 10% of your discretionary income.
  • After you make payments for 20 or 25 years, your loan balance is forgiven.
  • If your payments aren’t large enough to cover your interest costs, all or part of the interest that accrues during that time will be paid for by the government.

Eligible borrowers with no income, or very low income, won’t have to make payments at all under REPAYE. But unlike with forbearance, they won’t have to pay the full amount of interest that accrues while in this plan, and after 20 or 25 years of payments, their remaining balance will be forgiven (although they may have to pay income tax on the forgiven balance). For borrowers who can afford to pay more, those payments can help chip away at that debt.

“You don’t know what the future holds,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, a nonprofit organization that offers free expert advice on student loans to consumers. “If you use an [income-driven repayment plan] instead of forbearance, and let’s say things don’t improve the next year or the year after, you’re at least progressing toward loan forgiveness with the income-driven repayment plan.”

Both Mayotte and Campbell recommend using the Department of Education’s online Repayment Estimator to compare the costs of different repayment options.

If you have private student loans, income-driven repayment plans aren’t an option for you. However, you might be able to contact your lender and modify your payments.

When forbearance makes sense

Think about student loan forbearance like a fire extinguisher: In an emergency, it can be a helpful tool. But it’s not meant to be used all the time.

“Forbearance is almost always a last resort,” Mayotte says. She adds that when borrowers simply can’t afford their payments on their income, forbearance certainly won’t help; in fact, payments can get larger after forbearance when unpaid interest is added to the balance.

Consider breaking the glass on that forbearance option if you’re temporarily dealing with very high expenses, such as a large medical bill or an unavoidable, urgent home repair. You’ll still be responsible for the interest that accrues, but if taking a short break from payments helps you get on more stable financial footing, the cost might be worthwhile. Just try to avoid using this option for more than a few months, if you can help it. A different repayment option could save you thousands in the long run, even if it requires more paperwork upfront.

The article How to Manage Student Loan Debt Without Making It Worse originally appeared on NerdWallet.

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