How to manage student loan debt in uncertain times

We all want to be in control of our lives — and our futures. But as we all know, life can be unpredictable. No one can predict exactly when or how long periods of economic growth will occur. Nor, despite what many experts say, can anyone predict when there will be a prolonged economic downturn. They only become obvious in hindsight.

There is, however, something we can certainly do now to ensure we're financially ready for whatever economic challenges may be ahead: We can plan to take control of our finances, including our student loans.

Having a plan could help you avoid delinquency and default regardless of the economic environment and keep you from making knee-jerk financial decisions when you're under stress. It can also help you stay in control and feel more confident about your personal finances during uncertain times.

Take control of your spending and saving

Though life can change quickly, the basic tenets of successful money management never change. You need to monitor and control spending, maximize savings, and reduce debt. Here are some ways to accomplish that:

Set and live within a budget: Budgeting is one of the most important steps in successful financial management. In difficult financial times, it's more important than ever. Start by taking stock of all your expenses in a given month. These include necessities, such as food, rent/mortgage payments, and utilities, as well as bills, such as your cellphone and student loan, auto, and credit card payments. Also consider your discretionary spending like dining out, subscription services, and gym memberships. If your income is significantly reduced, you'll need to prioritize your spending by putting basic necessities first and cutting out or reducing non-essential expenses. The most important thing to remember is that budgeting is not just about creating a spending plan, but sticking to it.

Reach out: If you're having trouble paying installment bills, like your auto loan or mortgage, contact your lenders to see what assistance may be available. For example, your mortgage lender may offer a loan modification program, and your auto lender may allow you to pause payments. Another way to help you pay bills is to try and increase your income. For example, can you get a part-time job or side hustle? Or take in a tenant if you own a home?

Build your emergency savings fund: You never know when an unexpected expense or life situation could impact your finances. An emergency fund can be a safety net to help you manage those expenses. Experts recommend that you have six months of living expenses saved and easily accessible in your emergency fund. If you think your job may be at risk or if you have a lot of dependents, you may want to save even more.

Depending on the amount you owe in student loans, it could be a good idea to create a separate emergency fund with three to six months of student loan payments. It'll give you more confidence that you can make your payments, even if you experience a job loss or other financial difficulty.

The key to savings success is to make it a habit — and part of your monthly budget. For example, you can arrange to have a certain amount of money automatically transferred from your checking account to your savings accounts each month, or arrange to have portions of your paycheck direct deposited into those accounts. If you don't currently have money in your budget to save, consider funding your emergency savings accounts with money from a tax refund if you receive one.

Manage high-interest debt: Debt can be costly, especially when it's in the form of high-interest credit card payments — which can be a budget-breaker if you're dealing with reduced income. Start by looking at your credit card debt and paying off cards with the highest interest rates first. If your credit is good, you should consider moving your balances to a credit card that offers 0% interest on balance transfers. This could allow you to pay less interest and more toward the principal. Another option could be to consolidate debt with a home equity line of credit or mortgage refinance.

If you pay off or consolidate your debt, you'll want to keep some credit lines open in case you need easy access to more money than your emergency fund can cover. Whatever you do, be sure to use credit wisely. The last thing you want is to pile up more debt during an economic downturn.

Ways to manage your student loan payments

Whether you've experienced financial challenges or you want to prepare for challenges that may be in your future, there are some specific measures you can take now to manage your student loan debt. You can seek relief for both federal and private student loans, though federal loans do provide more options. Here are a few options to consider.

Apply for income-based repayment: If you have federal loans and reduced or no income, you could apply for income-based repayment. With income-based repayment, your loan payments are determined as a percentage of your discretionary income (income after taxes and housing, food, and other necessities). Your payments are re-calculated each year based on your income and family size, but if you currently have no income, your payments could be reduced to $0. There is no fee to apply for income-based repayment, but it would result in extending the term of your loan beyond the 10-year standard repayment period, which means you could end up paying more over the life of the loan.

If you have multiple federal student loans, you'll need to apply for income-based repayment plans with each servicer. Also note that some loans may not be eligible, including Perkins Loans and Federal Family Education Loans (FFEL), but you could consolidate those loans to be eligible.

Pause your payments with forbearance or deferment: In addition to lowering your federal student loan payments, you also may have options to temporarily pause them without damaging your credit via forbearance or deferment. Though both options allow you to pause payments, they do have some distinctions, including qualification requirements and interest accrual. With deferment, for example, interest is not accrued on some subsidized federal loans.

Before you apply for deferment or forbearance, contact your student loan servicer to find out how the interest is accrued, since that could significantly add to the amount of interest you'll pay. Another downside of both options is that paused payments do not count toward the minimums required to qualify for student loan forgiveness.

Though deferment and forbearance are available with federal loans, many private lenders offer these options, though offerings will vary by lender.

Consider refinancing your loans: If you're still employed and your credit score is good, you may be able to refinance your student loans with a private lender, which could potentially lower your payment by reducing your interest rate or extending the term of your loan. It's important to note that while you can refinance federal student loans with a private student loan, doing so will result in the loss of federal loan benefits such as your ability to apply for loan forgiveness or income-based repayment.^† Make sure you understand all you refinancing options before you proceed.

If you do refinance with a private lender, you may want to choose a longer repayment term, which would lower your required monthly payment. You still have the option to pay more on your loans if your financial situation improves.

Be calm and stay the course

Try as we might, we really can't predict what our economic future holds. Whatever happens, remember that nothing lasts forever — but good financial habits like planning, saving, and smart borrowing can make the difference of a lifetime.

Take control of your student loans

Perhaps the most important thing you can do is to take the time to seek out sound financial advice. Short-term financial decisions can have long-term effects, so it's critical to think clearly and plan as best as you can. Our colleagues are ready and available to listen and offer guidance. If you've been facing financial hardship or looking to take greater control of your finances, learn more about Education Refinance Loans.