How to handle college loan debt
Entry-level jobs are scarce for recent college graduates, which leaves the class of 2020 in a precarious position as their student loan debt comes due.
Taylor Cabrera has been job hunting for months since graduating from the University of Mississippi last spring with dual bachelor’s degrees in biology and physics, and has moved in with family in Miami. Her only solid job lead so far was a two-week marketing stint that didn’t pan out, though she said she’s feeling good after a recent interview for an entry-level mortgage position.
Despite her challenges, Cabrera said she knows she’s fortunate when it comes to her student loans. Earning hefty scholarships meant she took on $14,000 in debt, about half of what the average undergraduate carries, according to the Institute for College Access and Success.
“It’s pretty good compared to what everybody else has, but it still hurts my soul,” Cabrera said.
Student loan payments typically begin six months after graduation. But those with federal loans like Cabrera have some respite: There’s an automatic, no-interest payment pause, known as forbearance, in place for all borrowers with federal student loans through December.
Private loan borrowers didn’t get the same break. But all borrowers have options to make payments more manageable, whatever their employment status or type of debt they carry.
Employment barriers
Leaving college without a job offer isn’t uncommon, especially during economic downturns. But the class of 2020 faces unique challenges.
The effects of COVID-19 have hit every industry, said Nicole Smith, research professor and chief economist at Georgetown University’s Center on Education and the Workforce. She added that outside of telecommunications and tech, very few sectors are hiring right now.
“If you’re looking for a corona-proof job, it doesn’t exist,” Smith said.
Positions with titles that include “entry level” or “new grad” have dropped 68 percent compared with the same time last year, according to a June 2020 report by Glassdoor. Graduates with little or no experience are competing with millions of unemployed Americans.
On top of that, new entrants to the workforce can’t access the safety net of unemployment benefits, even as the prospect of student loan payments looms.
Options for borrowers
Until employers start hiring again, recent graduates have some options to ease their debt burden.
The federal payment pause gives them time to breathe since loan bills won’t be due until January, barring a possible extension. To manage payments when they restart, those without jobs can choose an income-driven repayment plan or an unemployment deferment.
An income-driven repayment plan is your best longterm option. It caps payments at a portion of your income — 10 percent for example — and extends the repayment term. If you’re unemployed — or underemployed — your payment could be zero. Contact your student loan servicer to enroll.
If you need short-term relief, unemployment deferment allows you to postpone repayment for up to 36 months in six-month increments. It’s less desirable than income-driven repayment because interest builds and is added to the total debt when repayment begins. To qualify for an unemployment deferment, you’ll need to apply with your servicer and prove you’re either receiving unemployment benefits or, in the case of recent graduates, seeking full-time work.
Come up with a plan
If you’re planning to change your loan payments, do it as soon as possible to keep payments manageable, said Scott Buchanan, executive director of Student Loan Servicing Alliance, a nonprofit trade association representing student loan servicers.
Even if you’ve yet to begin payments, you can talk to your servicer to start off in an income-driven repayment plan when payments begin in January, Buchanan says.
Private student loan borrowers have fewer options to alter or pause payments compared with federal student loan borrowers. Contact your lender to find out if you qualify for a temporary reduction in the payment amount or to request forbearance.
Several private lenders are offering disaster or emergency forbearance for up to 90 days in addition to any existing options. Unlike the current pause on federal loans, any private loan forbearance still accrues interest.