When you take out a loan to pay for college or graduate school, you must repay that loan at some future date. If you find yourself in the position of having to budget every month for a student loan payment after graduation, you are not alone. Many students now borrow at least some money to help finance their education. Yet excessive student loan debt can have negative ramifications.  For example, student loan debt may affect decisions to buy a home, a car, or to have children. Because student debt levels are likely to continue to increase as the cost of college and graduate school continues to outpace inflation, it is important to know how to manage this debt.

Repayment options

The federal government offers several repayment options for student loan borrowers. Along with the standard 10-year repayment plan, the government offers graduated plans (monthly payments start low and increase over time), extended plans (you extend the repayment period up to 30 years), income-sensitive plans (payments are tied to your monthly income), and consolidation plans (combine several loans with a lower monthly payment). Private lenders may or may not offer all these options, but it is worthwhile to research.

What happens if you can’t repay your student loans?

Rare is the individual who hasn’t run into difficulties at one time or another in repaying a student loan. If you do run into difficulty in repaying a student loan, be proactive.

The primary way to postpone the repayment of your student loan is to request a deferment or forbearance from your lender. This is a temporary postponement based on well-established criteria, such as unemployment or a full-time return to graduate school. Alternatively, in some cases, you may be able to obtain a cancellation of your loan, which means you do not have to repay your loan at all. An example where a cancellation is generally granted is if you become totally disabled.

If you are unable to obtain a deferment or forbearance from your lender and you do not meet the requirements for cancellation, yet you are still unable to repay your student loans, then you will be in default. When you are in default on your student loans, your loan will likely be passed on to a collection agency who is authorized to engage in some serious efforts to try and get you to pay, including letters, phone calls, wage garnishment, and tax refund interceptions.

As a last resort, you may decide to file for bankruptcy. However, be aware that there are special rules governing bankruptcy and student loans; not all student loans can be discharged in bankruptcy.

The student loan interest deduction

You can deduct up to $2,500 each year of the interest you pay on qualified student loans, provided you meet income limits. In 2019, for single filers, a full student loan interest deduction is available with a modified adjusted gross income (MAGI) up to $65,000 and a partial deduction is available with a MAGI between $70,000 and $85,000. For joint filers, a full deduction is available with a MAGI up to $140,000 and a partial deduction is available with a MAGI between $140,000 and $170,000.

About Hitchcock Maddox Financial Partners (HMFP):

HMFP is a comprehensive and collaborative financial planning firm headquartered in Trussville, AL, serving clients and their community since 1999.  Collectively, HMFP advisors have provided guidance in the areas of Financial Planning, Investing, Retirement and Insurance for over 35 years. For more information please visit www.hmfp.us or call 205-201-1401.   

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Hitchcock Maddox Financial Partners, a registered investment advisor and separate entity from LPL Financial.