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Navigating your student loans: Budget tips and repayment strategies

Federal student loan repayments have been reinstated, but many are finding it challenging to get back in the routine of incorporating these payments into their budgets. In fact, nearly 9 million borrowers did not make their first student loan payment due when repayment started in October 2023. If you fall into this category, you’re not alone. Here’s what you need to know about missed payments, the critical importance of budgeting and tips for responsible loan repayment.

What happens when you miss a student loan payment?

For many consumers, behind each missed payment lies a story of financial pressure, economic uncertainty and the struggle to balance numerous financial responsibilities. When you miss a payment, your loan becomes delinquent — and if you continue to miss payments, it will eventually enter default. For federal student loans, this occurs after approximately 9 months. A default note will have a negative impact on your credit score, and the lender can file a lawsuit against you to collect the debt. Defaulting on a federal loan can also have additional consequences, such as losing eligibility for federal student aid or facing garnishment of your tax returns and wages.

If you do have loans that have defaulted, there are options to get back in good standing. For example, federal loans offer rehabilitation and consolidation options. The Department of Education has also recently announced a one-time temporary program called Fresh Start that offers benefits to federal student loan borrowers to get out of default.

Tips to managing your budget.

Whether you’re resuming student loan payments or expect to start making payments for the first time, it’s important to keep a close eye on your budget and look for ways to increase your income while decreasing your spending. There’s no one-size-fits-all solution, but these tips can help make room for your student loan repayment:

  • Cutting down on discretionary spending
  • Finding more economical housing options
  • Reducing monthly bills
  • Increasing your income (e.g., with a second job or negotiating a raise)
  • Improving your credit score
  • Looking into income-driven repayment options

Strategies to help tackle student loan payments.

With the number of borrowers missing payments on the rise, it’s important to take steps to make sure you’re not one of them. For example, you may consider one of the federal government’s income-driven repayment (IDR) plans if your budget doesn’t have much room for adjustment. This type of approach bases your monthly loan payment on the amount of your income and family size. For some people, payments on this type of plan can be as low as $0/month. By the end of the repayment period in an IDR plan, any remaining balance that you haven’t paid off is forgiven.

Borrowers should proactively explore and choose repayment options that align with their current financial capabilities. The Department of Education offers four IDR plans:

  • Saving on a Valuable Education (SAVE) Plan
  • Pay As You Earn (PAYE) Repayment Plan
  • Income-based Repayment Plan (IBR)
  • Income-contingent Repayment Plan (ICR)

To help determine which plan may be right for you and see what your repayment options may be, consider using a student loan simulator. You’ll then fill out an application to apply for the plan you think would be the best fit for your circumstances.

If you’re able to, consider making additional payments toward the principal of your loan. You can make an additional payment at any time, or you can make a lump-sum student loan payment on the due date. Either strategy can save you money in the long run.

Additionally, if you have good credit and a steady job, then refinancing your student loan may be an approach worth considering. By refinancing, you can replace multiple student loans with a single private loan, ideally at a lower interest rate. If you opt for a shorter term, you can pay off your debt faster and save money on interest.

Ask for help navigating.

The alarming increase in missed student loan repayments underscores the urgency of prioritizing financial education and responsible budgeting. A trusted advisor can help you determine an effective strategy that best fits your situation to manage your student loan debt.

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