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Many people have student loan debt today… and lots of it. Americans owe a whopping $1.77 trillion (including federal and private loans), and the average balance is over $40,000.

Whether you’ve just received notice of your student debt for the first time or have been paying it down for years, it can be hard to live with a loan balance hanging over you. And it can be challenging to fit student loan payments into your budget. So, how do you live (and thrive) with the payments and the stress of student loan debt?

Keep reading, for starters. This guide will help you understand student loan debt solutions, how student debt impacts your financial situation, and how to budget well when you have student loans. You’ll also learn strategies for avoiding default and maintaining a healthy lifestyle. While it may feel tough right now, student debt doesn’t define you, and you can get through this.

Understanding Student Loan Debt

Your student loans can affect your financial present and your future. Right now, you might find it hard to make regular payments from month to month. Carrying student loan debt over time can also have a significant impact.

The Impact of Student Loans on Your Financial Future

Student loan debt could affect the following areas:

•  Your ability to qualify for a loan, such as a home loan, due to student loans affecting your debt-to-income ratio (DTI) — DTI is the relationship between your debt and income

•  Your ability to save for retirement

•  Your credit score (if you fail to make on-time student loan payments)

•  Your net worth (the value of the assets you own, minus your liabilities)

•  Your marriage or family life, possibly delaying your plans

Different Types of Student Loan Repayment Plans

As you focus on minimizing the impact that student loans have on your finances, it can be wise to consider the different types of student loan repayment plans. For federal student loans, they include fixed repayment plans:

Standard Repayment Plan: The Standard Repayment plan is a federal fixed repayment plan option. In this plan, you repay your loans for up to 10 years, or between 10 and 30 years for consolidation loans. (Consolidation loans mean converting your federal student loans into one payment.)

Graduated Repayment Plan: The Graduated Repayment plan begins with lower payments and increases every two years. You can make payments for up to 10 years, or between 10 to 30 years for consolidation loans.

Extended Repayment Plan: The Extended Repayment plan allows you to repay your loans over an extended period. You make payments over 25 years with this plan, which for many people is a valuable student loan debt solution.

Student loan servicers also offer income-based repayment, including the following plans:

•  Saving on a Valuable Education (SAVE); the SAVE Plan replaces the REPAYE program.

•  Pay as You Earn (PAYE)

•  Income-Based Repayment (IBR)

•  Income-Contingent Repayment (ICR)

Each option has different features, but generally, after you make payments for a certain number of months, the government will forgive the remaining balance.

Consider using the Federal Student Aid Loan Simulator to help you estimate your monthly student loan payments, which can help you find a loan repayment option that meets your needs and goals. You might find a program that feels like less of a financial stretch for you.


💡 Quick Tip: Some student loan refinance lenders offer no fees, saving borrowers money.

Create a Budget to Manage Student Loan Debt

Another helpful step when you are dealing with student loan debt is to find a budget that works well for you. There are many different types of budgets out there, and likely more than one could help you create a realistic plan that leaves room for some fun little splurges now and then. Most budgets involve the following steps:

1.   Write down your monthly income. How much do you bring in per month? This doesn’t necessarily just apply to your salary — include alimony, freelancing (like dog-walking or driving a rideshare), dividends, and other income you make.

2.   Write down your monthly expenses. What types of expenses do you have during the month, including your student loan payments? How much are you spending on a car loan, rent, or mortgage payment? What about utilities, insurance, clothing, and entertainment?

3.   Subtract your expenses from your income. This is a good way to calculate whether you lose money through your expenses or whether you have enough income to cover your expenses.

4.   Create a budget. Develop a budget so you know how much you should spend each month, plus the expenses you can’t get around, including food, shelter, and, yes, student loan payments. You might try the popular 50/30/20 budget, which has you allocate 50% on your take-home pay to the needs in life (which includes minimum loan payments); 30% to the wants in life (dining out, gym memberships, travel…the fun stuff); and 20% to saving. When you are repaying student loans, that last 20% may need to be allocated to debt for a while. And that 30% towards wants might have to face a bit of belt-tightening, too.

Strategies for Avoiding Default on Student Loans

If you fail to make payments on student loans, you may default on them. The level of default depends on the type of loan you receive.

Why is defaulting on student loans a big deal? And how does defaulting on student loans affect your financial picture? Here are details:

•  Your entire unpaid balance, with student loan interest, becomes due.

•  You no longer receive deferment or forbearance, and you also lose eligibility for other benefits, including repayment plan options.

•  You cannot receive additional federal student loans.

•  Credit bureaus will hear about the default, which can lower your credit score and take years to repair.

•  You may not be able to purchase or sell assets (such as real estate).

•  The government may withhold your tax refunds or federal benefits.

•  You may suffer from wage garnishment, meaning your employer directs some of your pay to your student loan debt. In addition, you may be liable for attorney and collection fees associated with the process.

Yes, this can be frightening to think about, but remember that there are ways to move forward and avoid these scenarios. Among the solutions to student loan debt can be staying organized, managing what you owe, and keeping track of loan payments.You might use a tracking system such as Google Docs to keep track of your payments, or set up alerts in your phone. There are also apps and websites available to help you keep up-to-date on where you stand with your student loan debt and your payments due.

Let lenders know when you change your address so they don’t lose track of you and you lose track of your loans. You can also consider consolidating your federal student loans so you have just one simple payment to make each month. Keep in mind, though, these two points:

•  When you refinance federal student loans with a private loan, you forfeit access to federal benefits and protections, such as deferment and forbearance.

•  If you refinance for an extended term, you may lower your monthly payment but pay more interest over the life of the loan.

Utilize Resources for Managing Student Loan Debt

Here are some resources that may help you manage your student loan debt better:

•  Ask your student loan servicer for more information about solutions to student debt. They may help you learn more about smart ways to pay off student loans.

•  Tools and apps can help you track and manage student loans, often offering financial literacy and debt management educational resources. Test out a few options for solutions for student loan debt:

◦  DebtPayoffPlanner.com

◦  Chipper.app

◦  Changed at gochanged.com

•  If you are still feeling overwhelmed by your student debt, know that you don’t have to tough it out. Explore talking with a credit counselor who has expertise in the area of student loans. You might contact the National Foundation for Credit Counseling (NFCC) to start. Beware potential scammers who charge money upfront and/or promise to make your debt disappear with no strings attached.

Maintain a Healthy Financial Lifestyle with Student Loan Debt

You may at times feel frustrated or worse with the fact that you have student loans to pay back. Plenty of people do. But remember that this is a phase you are moving through, akin to paying down a mortgage on a house or a car loan.

Spend some time and energy on what you might call financial selfcare. Building a healthy financial lifestyle starts with taking time to establish your money goals. It can make sense to start in the short-term with what you want to accomplish regarding your student loans. For example, you may want to put these solutions to student debt in your sights:

•  Put together a budget

•  Balance student loan payments with other financial goals

•  Build an emergency fund while repaying student loan

•  Strategize to build your credit score with on-time student loan payments

•  Consider ways to make your student loans more manageable, as outlined above.

If you think you might want to pay off your student loans quickly, you can apply any additional funds available and use either the debt snowball (where you pay off the smallest student loan first) or debt avalanche methods (where you pay off the student loan with the highest interest rate first). Once you pay those off, you move to the loan that has the next-largest balance or interest rate, respectively.

You can then move on to longer-term goals, and build your financial literacy as you learn about, say, how to save for a down payment on a house or your retirement. Debt can be stressful, but remember that there is a long road ahead of you. There’s time to eliminate your student loans and put your other plans in motion. In other words, with some time and energy invested, you’ve got this.

The Takeaway

Having student debt can be stressful, but it’s important to remember that living with student loan debt doesn’t have to crush your dreams and plans. Millions of people work to pay off their loans every month. You have options in terms of how you budget your funds, how you repay your loans, and whether or not to look into refinancing, forgiveness, and other ways to deal with your debt.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

How do you cope with student loans?

The first step in managing student loan debt is not to ignore it; that could hurt your credit score and force you to pay penalties and fees. Understand your loans — are they federal or private student loans? What is your current payment structure? Learn everything you can, and research the many repayment options you likely have. Also, explore different budgeting methods to take control of your finances. Meet with a reputable nonprofit credit counselor if you feel you’d benefit from further support.

What is the average student debt?

The current average balance per person for student loans is about $40,500.

How do people live on student loans?

Having a comfortable lifestyle while still making student loan payments is possible. However, budgeting well is important, so you know how much you can allocate toward expenses and areas of your life.

Photo credit: iStock/Rockaa

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

When both parents and kids in one family have student loans, you may benefit from a game plan about how to handle the debt and the stress that can go along with it. Perhaps the student is still in college and the parent is reaching the end of their payments. Or maybe the parent is currently getting a degree, and the child with student loans has just graduated and is living at home.

Whatever your particular situation may be, there is a silver lining when parents and kids both have student loans. You can all work together as a unit toward the same goal: to pay them off in the most manageable way possible.

Here, you’ll learn about the financial impacts of student loans, repayment strategies, how to prioritize financial security, and how to support each other. While being in debt can be hard, arming yourself with knowledge is a solid step forward.

Understand the Financial Impact

Student loans can have several impacts on individuals of any age. It can alter your budget and your debt-to-income ratio (also known as your DTI), meaning the amount of debt you carry versus your earnings. This, in turn, can make lenders less likely to offer you loans or credit, or do so at the most favorable rates.

To look at the big picture, student debt could affect your ability to do the following:

•  Purchase housing, including renting an apartment or qualifying for a mortgage

•  Get married due to financial setbacks and can also add stress to a marriage

•  Commit to attending graduate school

•  Build long-term savings

But keep in mind, plenty of people have student loans and achieve these things, whether the debt means a delay in plans or they find a way to forge ahead. And know that people without student loans also face financial challenges: Perhaps they have a lot of credit card debt or a mortgage that is difficult to pay. Know that you are not alone in having financial challenges.

If student debt proves to be really unmanageable, it can affect other areas of your life as well, and the consequences of default can range from ineligibility for more federal financial aid, having a default reported to credit bureaus, credit score impact, and paycheck garnishment.

Of course, you want to avoid these scenarios. So if your family unit has multiple members with student loans, it’s wise to start by having open communication between parents and kids. Take the following steps:

1.   Talk with each other. Don’t sweep the topic under the rug. Talking about it together can help you both share knowledge, support one another emotionally during what can be a difficult time, and come up with ideas for tackling your debt.

2.   Total it up. Identify the total student loan debt for parents and kids. Break it up individually and figure out how much you both owe and the types of loans you have. Federal or private? High interest rate or low interest rate? When does the loan interest accrue? Only after you map it all out can you see exactly what’s going on.

3.   Explore the implications of student loan debt on future financial goals. How will student loan debt affect your future financial goals? Writing down your future financial goals can help you create goals for moving forward.

4.   Budget together. Finding a budget that helps you manage and track your finances is crucial. Share learning about the different budgeting techniques available, experiment with them (including apps that may be provided by your bank), and land on a system that helps you.

💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

Create a Repayment Strategy

Next, you can create a repayment strategy. Both parents and students can follow these steps:

•  Understand the loans. Particularly in the child’s case, do they understand all the terms, including interest rate, repayment schedule, and cosigned loans? Cosigning means that the parents signed to obtain loans on their behalf. A Direct PLUS loan is a loan made to a parent to pay for a student’s education and cannot transfer to the child. The parent is legally responsible for repaying the loan.

•  Look into repayment plans. Will you stick with the Standard Repayment plan or would a Graduated or Extended plan work better? Reach out to your loan servicer to find out if you qualify for an income-driven repayment plan. An income-driven repayment plan bases your payments on income and family size. It can help ensure that you make manageable payments every month.

You might also benefit from learning about the SAVE Plan, which replaces the REPAYE Plan, and can make debt repayment more manageable for some borrowers.

•  See if you qualify for student loan forgiveness. If a government or nonprofit organization employs you, you might qualify for the Public Service Loan Forgiveness Program, or PSLF. If you qualify, you could have the remaining balance on your federal student loans forgiven. In other words, you won’t have to pay them back.

•  Consider consolidating federal student loans. Consolidating means combining one or more federal education loans into a new Direct Consolidation loan to lower your monthly payment amount or gain access to federal forgiveness programs.

•  Pay extra toward the principal. You can pay extra toward the principal, meaning you make more payments toward your loans every month — the principal is the amount you owe on your loans. This can help speed up repayment and potentially lower the amount of interest you pay over the life of the loan.

•  Consider refinancing student loans. You can also explore refinancing your student loans, which means replacing your current student loans with private student loans. This might enable you to get a simpler single monthly payment that is more affordable. However, it’s important to know these two facts:

◦  When you refinance federal student loans with private ones, you forfeit federal benefits and protections, such as deferment and forgiveness. For this reason, think carefully about which option best suits your needs.

◦  When you refinance with an extended term, you may get a lower monthly payment, but you could pay more interest over the life of the loan. This knowledge can help you make an informed decision.

Yes, that’s a lot of information to digest and contemplate. What’s the right student loan debt solution? Ultimately, it’s determining the repayment strategy that will help you meet your financial goals while paying off your loans. Talking to your loan servicer about options can help, as can speaking with a nonprofit credit counselor who specializes in managing student loans.

Prioritize Financial Security

What does it mean to prioritize financial security? Financial security means having the money to cover the necessities in your life, like food, water, and shelter, and having a safety net, like an emergency fund and having money stashed away for your future retirement. It also means balancing loan repayments with these other financial obligations.

Building financial stability could also include:

•  Creating a budget: Creating a budget involves totaling up your income and subtracting your expenses, choosing a budgeting system, like an app, and tracking your expenses. Many experts recommend the 50/30/20 budget rule, which advocates spending 50% of your budget on necessities, 30% on wants, and 20% on savings and additional debt repayment.

•  Putting together an emergency fund: Try to put some money aside for an emergency fund. Many experts recommend at least $1,000 to start and then go on to save three to six months’ worth of emergency expenses. That said, $1,000 can be a significant chunk of money. Setting up automated deductions from checking into a high-yield savings account ($20 or so per paycheck is fine) can get you started.

Building an emergency fund can help you combat unexpected expenses that may come up, like a job loss.

•  Setting long-term financial goals: What long-term financial goals do you have? Set some long-term financial goals, such as saving for retirement or achieving homeownership with student loans. Both parents and college-aged or newly graduated kids can do this with a financial advisor who can help everyone balance loan repayments alongside other financial aspirations.

Support Each Other

This is a biggie, emotionally and financially. As you discuss your money goals, consider creating a joint plan. Kids should remember that parents still need support throughout this journey, and the reverse is true. Paying off debt and staying motivated during your repayment journey can be incredibly stressful.

Reach out to the people who will support you in your journey, and that includes resources and support networks for guidance, such as your student loan servicer, a financial advisor, and, if stress is an issue, a mental health provider.

Planning for the Future

Planning for the future may seem overwhelming while managing student loan debt. However, you don’t have to go it alone. Consider meeting with a financial advisor to discuss how to balance today (as in, your student loan repayment strategies) and tomorrow, such as putting away some funds for retirement.

It can be a good idea to have an objective, outside expert come in and evaluate your situation so they can help you devise a plan of action — in both kids’ and parents’ situations. You may feel as if you can’t possibly save for the future while focused on paying off your student debt, but a trained professional can often offer wise guidance.

Both parents and students may also wonder how to save for college for future generations. Ultimately, it’s important to secure your financial path first to reach your long-term financial goals and achieve financial freedom before worrying about future generations. After all, grandchildren can also borrow for college, but you can’t borrow for retirement. That said, this is another good topic to broach with a financial expert who is familiar with student loans and saving.

The Takeaway

Student debt can be challenging on its own, but when two generations of the same family are paying off their loans, it can feel overwhelming. It’s important to remember that student debt is a phase you are moving through, like paying off a car loan or mortgage. It doesn’t define you, nor is it with you forever. By supporting one another emotionally, budgeting well, and exploring repayment options, families can take control of their debt and pay it off in the most manageable way possible.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

How does student debt affect families?

Student debt can affect families in many ways, from stretching the family budget thin to making it difficult to save for long-term financial goals. However, families that devise a plan and explore their loan repayment options can pay off their debt and work towards future goals successfully.

What is the average student loan debt?

The average student loan debt is $37,718 on average per borrower of federal loans — about 92% are federal student loans and the remaining are private student loans. Including both federal and private loans, borrowers in the U.S. owe about $1.75 trillion in student loan debt.

Are children responsible for parents’ student loan debt?

No, children are not responsible for parents’ student loan debt. However, parents may be legally obligated to repay student loans on behalf of a child if they took out Parent PLUS loans.

Photo credit: iStock/Daniel Balakov

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Whether you’re in the market for a new student loan or looking to lower your current student loan payments, there may be a federal loan program available to help.

Student loan programs sponsored by the federal government are available to any eligible borrower (not just federal employees) and don’t always require a credit check. They also come with some advantages over private student lending options, such as income-based repayment plans, forgiveness programs, and (in some cases) lower interest rates.

Whatever stage you’re at in your education or borrowing journey, here’s what you need to know about federal student loan programs.

Why Consider Federal Loan Programs?

The federal government offers student loan programs for undergraduate students, graduate students, as well as those who are in the repayment phase of their student loan journey. These programs include:

•   Direct Subsidized Loans With Direct Subsidized Loans, which are available to students who demonstrate financial need, the government pays all the interest that accrues on the loan during school and for six months after graduation.

•   Direct Unsubsidized Loans Direct Unsubsidized Loans are available to eligible undergraduate, graduate, and professional students and are not based on financial need. With these loans, students are responsible for repaying all interest that accrues on the loan.

•   Direct PLUS Loans Graduate or professional students (and parents of undergraduate students) can tap into Direct PLUS Loans. Eligibility isn’t based on financial need, but you must undergo a credit check. These loans have higher interest rates and fees than Direct Unsubsidized Loans, but you can borrow more money — up to your total cost of attendance, minus other aid received.

•   Direct Consolidation Loans Direct Consolidation Loans allow you to combine your eligible federal student loans into a single loan with one loan servicer. This can simplify repayment. However, it won’t lower your interest rate.


💡 Quick Tip: Ready to refinance your student loan? You could save thousands.

Benefits of Federal Loan Programs for Students

Federal loan programs offer a number of benefits for college students. Here are some to keep in mind.

•   Payments not due until six months after graduation: Students don’t need to make any payments on their student loans while they are in school at least half-time or during the post-graduation grace period, which is six months.

•   Fixed interest rates: Federal student loans have fixed interest rates that are often lower than student loans from private lenders. For federal loans first disbursed on or after July 1, 2023, and before July 1, 2024, the rate is 5.50% for undergraduate Direct Subsidized and Unsubsidized Loans; 7.05% for Direct Unsubsidized Loans for graduate students; and 8.05% for Direct PLUS Loans.

•   Subsidized options: If you have financial need, the government may offer you a subsidized loan, which means the government pays the interest while you’re in school at least half-time and for six months after you graduate.

•   No credit checks for certain loans: You don’t need a credit check to qualify for Direct Subsidized or Unsubsidized Loans.

Federal Loan Programs to Consider After You Graduate

Once you graduate and need to begin paying back your federal student loans, the government offers a number of programs that can make repayment more manageable. Here’s a look at some of your options.

Federal Student Loan Repayment Plans

The Education Department offers a number of different repayment plans, including long-term plans that can last up to 30 years. You may be able to lower your monthly payment if you opt for a longer repayment term. Extending your repayment term generally means paying more in interest overall, though.

Fixed repayment plans include the Standard, Graduated, and Extended plans. Here’s a look at how they compare.

Income-Driven Repayment Plans

Income-driven repayment (IDR) plans aim to make student loan payments more manageable by tying them to the borrower’s income. They allow you to pay a percentage of your discretionary income toward federal loans for 20 to 25 years, at which point the remaining loan balances are forgiven.

The Saving on a Valuable Education (SAVE) Plan is the newest and one of the most affordable repayment plans for federal student loans. For some borrowers, payments can be as low as $0 per month.

Here’s a look at how the four IDR federal loan payment programs stack up.

Student Loan Forgiveness Programs

In addition to the loan forgiveness associated with IDR plans, the federal government offers other federal loan forgiveness programs, including Public Service Loan Forgiveness (PSLF), which is for public-sector workers. The PSLF program allows you not to repay the remaining balance on your Direct Loans as long as you’ve made the 120 qualifying monthly payments under an accepted repayment plan and worked for an eligible employer full-time.

There is also a separate forgiveness program just for teachers, as well as one borrowers with permanent disabilities.

Federal Student Loan Consolidation Program

If you have multiple federal student loans, you can consolidate them into a single new loan (called a Direct Consolidation Loan) with new repayment terms. This can simplify the repayment process, since you’ll only have one payment and one loan servicer to keep track of.

Federal loan consolidation also allows some borrowers (such as those with Federal Family Education or Perkins Loans) to access repayment and forgiveness programs that they otherwise are ineligible for.

The federal student loan consolidation program does not lower your interest rate, however. Your new fixed interest rate will be the weighted average of your previous rates, rounded up to the next one-eighth of 1%.

Your new loan term could range from 10 to 30 years, depending on your total student loan balance. If you extend your loan term, it can lower your monthly payments but the total amount of interest you’ll pay will increase.

It’s also important to note that when loans are consolidated, any unpaid interest is added to your principal balance. The combined amount will be your new loan’s principal balance. You’ll then pay interest on the new, higher balance. Depending on how much unpaid interest you have, consolidation can cost you more over the life of your loan.

Recommended: Student Loan Consolidation vs Refinancing

Factors to Evaluate Before Refinancing

Refinancing is the process of taking out a new student loan from a private lender (ideally with better rates and terms) and using it to pay off your existing federal and/or private student loans. Generally, refinancing only makes sense if you can qualify for a lower rate. Here are some things to consider before you explore refinancing your student loans.

Current Interest Rates and Loan Terms

Refinancing can potentially allow you to lower your monthly payment by getting a lower interest rate than what you currently have, extending your loan term, or both. Keep in mind, though, that lengthening your loan term may mean paying more in interest over the life of the loan.

Credit Score Requirements

Not every borrower is eligible for refinancing. To get approved, you typically need a credit score of at least 650. A score in the 700s, however, gives you a much better chance of qualifying.

Your credit score also helps determine your new interest rate. Generally, the better your credit score is, the more competitive your interest rate will be. If you can’t qualify for an attractive refinance on your own, you might want to recruit a cosigner who has excellent credit.

Potential Savings Through Refinancing

One of the main reasons people refinance their existing student loans is because they can find a lower interest rate through a new lender. This can help you save money, potentially thousands over the life of your loan. A lower rate can also help you pay off your loan faster, or lower the amount you pay each month.

While student loan interest rates have been on the rise in the last couple of years, you may still be able to do better if your financial situation has considerably improved since you originally took out your student loans or you have higher-interest federal student loans.

Impact on Loan Forgiveness Options

Refinancing federal loans makes them ineligible for federal forgiveness and protections. If you think you may benefit (or are currently working towards) public service, teacher, IDR, or other federal forgiveness program, it may not be a good idea to refinance your federal student loans. Doing so will bar you from getting your federal loans forgiven.

Refinancing also makes your loans ineligible for government deferment and forbearance programs, which allow you to temporarily postpone or reduce your federal student loan payments. However, many private lenders offer their own deferment and forbearance programs.

💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to career services, financial advisors, networking events, and more — at no extra cost.

The Takeaway

Federal loan programs, including loan consolidation, graduated repayment plans, income-driven repayment plans, and forgiveness programs can make repaying your federal student loans more manageable after you graduate.

If you have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans, however, it can also be worth looking into private student loan refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Does it make sense to refinance student loans?

Refinancing student loans can make sense if you are able to qualify for a lower interest rate through a new lender. This can help you save money, potentially thousands over the life of your loan. A lower rate can also help you pay off your loan faster, or lower the amount you pay each month.

Keep in mind that refinancing federal student loans with a private lender means giving up federal protections and relief programs.

Under what circumstances would you want to consider refinancing a debt?

You might consider refinancing a debt if your financial situation has improved since you originally got the loan and can now qualify for a lower rate. Refinancing also allows you to extend your loan term, which can lower your payments. Keep in mind, however, that a longer term generally means paying more in overall interest.

Which is a downside of refinancing out of federal student loans?

The biggest downside of refinancing your federal student loans is forfeiting federal protections, such as income-driven repayment plans and loan forgiveness options.

Photo credit: iStock/Drazen Zigic

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

If you default on your federal student loans, the government can typically force you to pay without a court order through administrative wage garnishment. With this process, your student loan servicer is able to collect 15% of your paycheck to automatically go towards loan repayment.

Wage garnishment can happen if you’ve missed payments on federal student loans for at least nine months (and haven’t entered an agreement with your lender to pay them back), and may continue until your loan is paid in full or the default status is resolved. Your wages can also be garnished if you default on private student loans, but the process works differently.

Learn what you can do to avoid wage garnishment on your student loans, plus how to get help with student loan garnishment once it has started.

What Is Administrative Wage Garnishment?

Administrative wage garnishment (AWG) is a debt collection method at the federal level. A federal agency can require a non-federal employer to withhold money from an employee’s paycheck to pay for a debt.

Typically, an employer may withhold up to 15% of your wages to repay a defaulted student loan. However, if you have multiple loans in default with different companies or have an existing child support order, garnishment can increase to 25%.

For federal student loans, you must have missed 270 (or nine months of) payments before your loan goes into default and the government can garnish your wages. The time-frame for default and garnishment can vary for private loans, and will depend on the policy of the lender.

With federal student loans, wage garnishment can take place without your servicer taking you to court. With private student loans, on the other hand, most states require lenders to obtain a court order to garnish your wages if you default on a loan.

Generally, wage garnishment can continue until your loan balances plus interest and fees are paid back, or your loan is removed from default.

An important note about federal student loans: The U.S. Department of Education is providing a temporary “on-ramp” to repayment between October 1, 2023 and September 30, 2024 to protect federal borrowers from the worst consequences of not making their student loan payments. During this transition period, servicers aren’t reporting missed, late, or partial payments as delinquent. In addition, loans will not go into default.

For borrowers who defaulted on their loans prior to March 13, 2020, the Education Department has created a Fresh Start program , which temporarily offers special benefits for borrowers to help them get out of default (more on this program below).


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Does Administrative Wage Garnishment Affect Student Loans?

If your federal student loan goes into default, the Education Department (the lender) is required to send you a notice of wage garnishment by mail to the last known address 30 days before wage garnishment starts. This notice must inform you of the nature and amount of the debt and the agency’s intention to initiate garnishment.

You’ll be given the option to establish a voluntary repayment agreement as well as to request a court hearing.

If you don’t do either, wage garnishment will start. Your employer is required to comply with a wage garnishment request from the government. You’ll continue having money garnished from your paycheck until your loan is paid in full or has been removed from default.

If you request a hearing within the 30-day window, the government isn’t allowed to take money from your paycheck until the hearing is over and a decision is made.

With private student loans, wage garnishment follows a different process. For starters, private lenders may consider your loan in default after you’ve missed payments for three (rather than nine) months, though the time frame varies by lender. Once you default, a private lender may assign your loan to their collections department or sell your loan to a third party debt collection agency. The lender or collector must then sue you, take you to court, and receive a court order before they can garnish your wages.

Recommended: Understanding Student Loan Requirements

How to Protect Yourself From Student Loan Wage Garnishment

Making your student loans payments on time and in full is the simplest way to protect yourself from student loan wage garnishment.

If you’re having trouble keeping up with your payments, the best time to take action is when you begin missing student loan payments and before you actually default on the loan. At this point, you’ll want to reach out to your loan servicer to discuss options that can help keep your loan in good standing. Here are some to steps that can help:

•   Look into deferment and forbearance. The federal government has several deferment and forbearance options available, and some private lenders also offer forbearance programs. Keep in mind, though, that interest will likely still accrue on your loans during the deferment or forbearance period, which can make your loan more expensive in the end.

•   Switch repayment plans to get a lower monthly payment. The Education Department offers a number of different repayment plans, including long-term plans that can last up to 30 years. You may be able to lower your monthly payment if you opt for a longer repayment term. Extending your repayment term generally means paying more in interest overall, though.

•   Request an income-driven repayment plan. Income-driven repayment plans let you pay a percentage of your discretionary income toward federal loans for 20 to 25 years, at which point the remaining loan balances are forgiven. For some people, payments on an income-driven repayment plan can be as low as $0 per month.

•   Refinance your student loans for a cheaper rate. If you can qualify for a lower interest rate, refinancing your student loans with a private lender can lead to lower monthly payments. If you have multiple loans, it can also simplify repayment by consolidating them into one loan. Just keep in mind that refinancing federal loans with a private lender means giving up federal protections like deferment, forbearance, and access to income-driven repayment plans.

💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

Stopping AWG Orders

If your loans are already in default, you’ve received notice of wage garnishment, or you’re currently having your wages garnished, here are four steps you can take to remedy the situation.

1. Negotiate a Loan Settlement

You may be able to negotiate a loan settlement with a collections agency. Consider offering a lump sum or series of installment payments, and be sure to mention any specific financial hardships or medical issues you’re experiencing. A private lender or debt collector may be willing to settle the loan for less than the amount owed, such as principal and 50% interest or 90% principal and interest, or waive the collection fee (which may be 10% to 15% of the loan balance).

It is generally difficult to negotiate a loan settlement deal with federal student loans. Because federal loan servicers have multiple ways to recoup their money, including AWG, they have less incentive to negotiate with borrowers. You can only qualify in extenuating circumstances, and you’ll likely still have to pay the majority of your debt.

2. Consolidate Defaulted Student Loans

If you have a federal loan already in default, you might consider loan consolidation. This allows you to pay off defaulted federal loans with a new loan (called a Direct Consolidation Loan) and new repayment terms. To consolidate a defaulted loan, you need to either agree to repay your new loan under an income-driven repayment plan or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidation.

Keep in mind that eligible borrowers will be able to use the Fresh Start program to get out of default without having to consolidate.

Also note that if you want to consolidate a defaulted loan that is being collected through wage garnishment, you can’t consolidate the loan unless the wage garnishment order has been lifted or the judgment has been vacated.

3. Enter Fresh Start or a Loan Rehabilitation Program

Normally, one of the main ways to get out of federal student loan default is by rehabilitating your loans. Right now, however, loan rehabilitation has been temporarily replaced by the Fresh Start program.

Fresh Start is a short-term, one-time program to provide relief for borrowers with defaulted federal student loans. Fresh Start automatically gives you some benefits, such as restoring access to federal student aid (including federal loans and grants). To use Fresh Start to get out of default and claim the full benefits of the program, you must contact your loan holder.

After September 2024, when Fresh Start ends, loan rehabilitation will be an option again. Loan rehabilitation is a program offered by the federal government that involves entering into a repayment agreement to get your loan out of default and back into good standing. If you make a certain number of consecutive payments on time under the rehabilitation agreement, you can get your loan out of default and avoid wage garnishment. Contact your loan holder for more information.

Private lenders typically don’t offer a formal loan rehabilitation option. However, if you’ve defaulted on your private loans, it’s worth reaching out to your lender and see what payment assistance programs they provide.

4. Dispute the Wage Garnishment

If you receive a wage garnishment notice from the federal government, you have the right to dispute the notice and request a hearing, in writing, within 30 days.

This could be a good option if you do not agree that you owe the student loan debt you’re being asked to pay, disagree with the amount, or believe you weren’t properly notified about the garnishment.

You may also ask for a hearing if you believe that wage garnishment could create an extreme financial hardship in your life, or if you have been employed for less than 12 months after losing a previous job.

If any of these scenarios ring true, be sure to make a request for a hearing in writing and that the letter is postmarked no later than 30 days from the date the wage garnishment notification was sent. You’ll also want to include proof to support your objections to the debt or the garnishment.

Student Loan Refinancing Tips

If you’re in danger of wage garnishment, refinancing your loans could be a way to get back on top of repayment. Refinancing involves getting a new student loan with a private lender and using it to pay off your existing federal or private student loans.

Refinancing can potentially allow you to lower your monthly payment by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.)

If you decide refinancing is right for you, it’s a good idea to assess your credit health, research lenders, and shop around for the best rates. If a lender offers a prequalification tool, consider taking advantage — these applications require only a soft credit inquiry on your credit report. Getting prequalified can help you see the rates and loan terms you might qualify for if you refinanced.

FAQ

How are administrative wage garnishments used?

Administrative wage garnishment is a debt collection process that allows a federal agency to order a non-federal employer to withhold up to 15% of an employee’s disposable income to pay a past-due (non tax) debt owed to the agency. For federal student loans, you typically must miss nine months of payments before the government can begin wage garnishment.

What happens if you get your wages garnished?

Wage garnishment happens when a court (or federal agency) orders that your employer withhold a specific portion of your paycheck and send it directly to the creditor or lender until your debt is resolved. Common sources of wage garnishment include child support, consumer debts, and student loans. Your wages will be garnished until the debt is paid off or otherwise resolved.

How do you respond to a wage garnishment?

First, you’ll want to carefully read the judgment to verify that all of the information is accurate. If you believe the garnishment was made in error, you can file a dispute.

If the garnishment is justified, it’s a good idea to call the creditor or loan servicer to see if you can work out a payment plan that brings the loan back to good standing and allows you to pay it off in a way that works with your budget. Or, you can simply accept the wage garnishment and pay off the debt in the installment plan instructed by the judgment.

Photo credit: iStock/fizkes

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Income-driven repayment (IDR) plans adjust your monthly student loan payments to a percentage of your discretionary income. Depending on your income and family size, you could have a payment as low as $0.

In this case, you can pay nothing on your student loans without falling into delinquency or default. Plus, you’ll still be making progress toward loan forgiveness, which you can receive after 20 or 25 years on an IDR plan.

Your $0 monthly payments can also count toward Public Service Loan Forgiveness (PSLF), which offers loan forgiveness after 10 years of working at a qualifying not-for-profit or government agency.

That’s the topline on this situation. Read on to learn more about how qualifying for $0 student loan bills on an IDR plan can impact your payment obligations and progress toward loan forgiveness.

What Are Income-Driven Repayment Plans?

When paying back student loans, you have the option of applying for an income-driven repayment plan. An IDR plan can be a good fit if you’re looking to reduce your monthly payments, since it adjusts your bills to a percentage of your discretionary income.

There are four options for income-driven repayment:

•   SAVE: The SAVE plan, which replaces the REPAYE option, adjusts your payments to 10% of your discretionary income. It calculates that as the difference between your annual income and 225% of the poverty guideline for your family size and state. It has the most generous interest subsidy of all the IDR plans, as the government will cover any unpaid interest from month to month. Starting in the summer of 2024, the SAVE plan may also offer loan forgiveness after 10 years, depending on your loan amount and type. Plus, it will slash payments on undergraduate student loans to 5% of your discretionary income.

•   Pay As You Earn (PAYE): The PAYE plan also adjusts your payments to 10% of your discretionary income, but the discretionary income calculation is less generous at 150% of the poverty guideline. It offers loan forgiveness after 20 years.

•   Income-Based Repayment: On this plan, you’ll pay 10% or 15% of your discretionary income for 20 or 25 years, depending on when you borrowed your loans.

•   Income-Contingent Repayment: This plan is the least generous of the IDR plans. It sets your payments at 20% of your discretionary income, which uses 100% of the poverty guideline. However, ICR is the only income-driven plan available for parent loans.

💡 Quick Tip: Ready to refinance your student loan? You could save thousands.

Student Loan Forgiveness Overview

Most income-driven repayment plans offer loan forgiveness at the end of your repayment term. Currently, all the plans require 20 or 25 years of repayment before you can get your remaining balance forgiven.

Starting in July 2024, though, the SAVE plan will offer a faster path to loan forgiveness for some borrowers.

•   Specifically, you can get forgiveness after 10 years on SAVE if your original balance was $12,000 or less.

•   Another year will be added to your repayment term for each additional $1,000 you borrowed, up to a total of 20 years for undergraduate student loans and 25 years for graduate student loans or a mix of both.

Keep in mind that you might have to pay taxes on any loan forgiveness you receive from an IDR plan after 2025. Prepare to pay this final student loan bill before you can say goodbye to your federal student debt.

Recommended: Guide to Student Loan Transfers

If My IDR Plan Is $0, Does It Count Towards Payments for Forgiveness?

The answer to “What is the minimum student loan repayment?” can, in fact, be zero. And if your IDR plan doesn’t require you to pay anything on your student loans, you may be relieved to hear that your IDR student loan $0 monthly payments will still count toward student loan forgiveness. Even though you’re not paying anything, you’ll still be making progress toward the 20 or 25 years of required payments to get your loans forgiven.

If you’re pursuing loan forgiveness through the PSLF program, you’ll get credit for your $0 payments for that as well. You need to make 120 payments on an IDR plan, along with working in eligible public service full-time, to qualify for PSLF. Unlike the loan forgiveness you get from an IDR plan, the forgiveness you get from PSLF is not taxable.

Keep in mind, though, that your payments may not stay at $0 forever. You must recertify your income and family size on an annual basis so your loan servicer can recalculate your income-based repayment plan. If your circumstances change, your monthly payment on an IDR plan could increase.

Should I Refinance My Student Loans Instead?

If you’re looking for strategies to manage your student loans, refinancing is another option. When you refinance student loans, you exchange one or more of your existing loans from a private lender.

On the plus side:

•   If you have good credit and steady income, you could qualify for a better interest rate than you have now. Reducing your interest rate could save you money over the life of your loans and help you pay off your debt faster.

•   You’ll also get to choose new terms for paying off your student loan. You could choose a short term to pay off your debt sooner or a longer term of 15 or 20 years to reduce your monthly payments. Keep in mind that a longer term can mean you pay more interest over the life of the loan.

Refinancing does have some risks, though, that are important to understand before you apply.

•   Specifically, refinancing federal student loans means losing access to federal benefits and protections, such as income-driven repayment plans and forgiveness options.

If you want to use income-driven repayment, pursue loan forgiveness, or take advantage of another federal perk, it wouldn’t be wise to refinance your federal student loans with a private lender. However, refinancing high-rate private student loans could be advantageous if you can get a better interest rate.

Recommended: Why Your Student Loan Balance Never Seems to Decrease

The Takeaway

Income-driven repayment can be a lifesaver if you’re struggling to afford your monthly student loan payments. An IDR plan will limit your payments to a percentage of your income while extending your loan terms to 20 or 25 years. If you still owe a balance at the end of your term, the rest will be forgiven.

Depending on your finances, you could get a payment as low as $0 on an IDR plan, but you’ll still get credit toward loan forgiveness. Keep in mind, though, that you may be in repayment for a long time on an IDR plan before you can say goodbye to your student loans.

You may also want to consider refinancing them for better rates and new repayment terms.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

How do I qualify for a $0 student loan payment?

You may be able to qualify for a $0 student loan payment on your federal student loans through an income-driven repayment plan. These plans calculate your monthly payments based on your discretionary income and family size. If your annual income falls below a certain percentage of the poverty guideline for your state, you could qualify for a $0 monthly payment.

Can I lower my IDR payment?

Your loan servicer will calculate your IDR payment based on your discretionary income and family size. If you have a decrease in your income or increase in your family size, you could see your IDR payment go down. You’ll recertify your IDR plan annually with your most up-to-date information, but you can request an adjustment sooner.

Will income-based repayment go away?

There’s no sign that income-based repayment plans will go away. In fact, the Biden administration recently introduced the SAVE income-driven repayment plan, which offers a more generous payment calculation and interest subsidy than the income-driven repayment options.

Photo credit: iStock/JLco – Julia Amaral

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.