Do’s and Don’ts of Managing Student Loans After a Layoff

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Layoffs can be difficult, especially when you’re grappling with student loan payments. It’s an overwhelming scenario: an abrupt loss of income compounded by the responsibility of repaying education debts.

However, having a roadmap of the do’s and don’ts can alleviate some of the stress. Here’s a guide to help you navigate managing your student loans after a layoff.

Things To Do When Managing Student Loans After a Layoff

Dealing with student loans after losing your job can be stressful. Here are some of the steps you should take.

Communicate With Your Lender

One of your first steps should be informing your lender about your situation. Many lenders have provisions for borrowers experiencing financial hardship. They can provide insights into deferment, forbearance, or even interest rate reductions. Keeping an open line of communication ensures you’re making informed decisions.

Consider Federal Loan Deferment or Forbearance

If you have federal student loans, explore options like deferment or forbearance. Both allow you to stop making payments or reduce the amount you pay temporarily. While interest might still accrue, it offers a temporary respite, giving you time to get control over your financial situation.

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Research Income-Driven Repayment Plans

Another option for federal loans is an income-driven repayment plan. This type of plan adjusts monthly payments based on your income and family size. If you’re laid off and your income drops significantly, your monthly payment could be significantly reduced or even become zero.

Prioritize an Emergency Fund

If you have some extra cash, consider reallocating some of it towards an emergency fund. This fund can act as a buffer, allowing you to cover essential expenses, including minimum student loan payments, while you’re between jobs.

Seek Financial Counseling

Reach out to a financial counselor or advisor familiar with student loans. Their guidance can be invaluable, helping you develop a plan tailored to your unique situation.

What You Shouldn’t Do

There are also actions you shouldn’t take when it comes to your student loans. Here are some things you should avoid when managing student loans after a layoff.

Don’t Ignore Your Loans

Ignoring your student loans can lead to bigger problems, such as default. Defaulting can damage your credit score, leading to increased interest rates and fees, wage garnishments, and withholding of tax refunds. Always address the situation head-on.

Don’t Forget About the ‘On-Ramp’

There is a temporary cushion available if you’re struggling with payments. From October 1, 2023, to September 30, 2024, a 12-month student loan “on-ramp” is in effect, allowing borrowers to miss payments without facing penalties, such as reduced credit scores or defaults.

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If you become unemployed during this period, you can miss payments without needing a deferment or forbearance. This on-ramp happens automatically if you skip a payment. However, interest continues to accrue, and regular payments are still expected.

Don’t Rely on Credit Cards

While it might be tempting to use credit cards to cover your loan payments, this can lead to compounding debt. The high interest rates on credit card balances can quickly snowball, further exacerbating your financial situation.

Don’t Liquidate Retirement Funds Prematurely

Although it might seem like a ready source of cash, accessing retirement accounts early often comes with penalties and tax consequences. Moreover, you’d be depleting funds meant for your future.

Don’t Fall for Scams

Unfortunately, there are companies that prey on those in financial distress. Be wary of any service that promises loan forgiveness for a fee or asks for your personal information. Always research the legitimacy of any organization you consider working with.

Don’t Hesitate to Negotiate

If you have private student loans, your options might seem more limited than with federal loans. However, it’s still worth reaching out to your lender to discuss your situation. They might offer temporary interest rate reductions or other forms of assistance.

Managing Student Loans Effectively

Facing a layoff while managing student loans can be daunting. However, developing a plan can help you navigate this challenging period more effectively. Remember, you’re not alone. By seeking assistance, being proactive, and making informed decisions, you can find a path that sees you through your immediate challenges and the long-term responsibility of repaying your loans.

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Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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