Student Loans and Recession: What Borrowers Need to Know Now

Student loan payments can be a substantial financial burden in the best of times, and with a possible recession looming, it’s worth thinking about how you’ll manage that debt in the worst of times. Whether you have federal or private student loans, you have options when faced with financial hardship, such as requesting a period of deferment or forbearance and employing specific debt repayment strategies.

Financial Dangers of Failing to Repay Your Student Loans

There are two primary types of student loans: federal and private. Federal student loans are backed by the government, typically have lower interest rates, and usually include more favorable repayment options. Private student loans are offered by banks, credit unions, and other financial institutions, and they’re often more expensive and less flexible when compared to their federal counterparts.

If you fail to make your student loan payments on time, you could face serious financial consequences. Federal student loans are usually reported as delinquent within 60 to 90 days, depending on the loan type. Meanwhile, private student loans can be reported delinquent in as little as 30 days after a missed payment.

A prolonged period of delinquency will eventually cause you to default on your loan. Federal student loans generally enter default after 270 days of non-payment, but they’re usually only reported to collections after 360 days. Private student loans may enter default in as little as 120 days.

Both delinquencies and defaults are listed on your credit report, which can damage your credit score. For federal student loans, the government can garnish your wages, tax refunds, and other government payments to recoup its losses. A private lender, meanwhile, may either try to collect on your debt directly (which may entail taking you to court) or hire a collection agency to act on its behalf.

Resources to Help You Manage Loan Payments

For most federal student loans, you can request a period of deferment or forbearance if you’re experiencing financial hardship. However, interest will continue to accrue on your loans while they’re in forbearance or (in certain cases) deferment. This will cause your balance to increase, meaning you’ll pay more over the life of your loans. Additionally, if you’re working toward student loan forgiveness, deferment and forbearance periods may not count toward your progress.

Forbearance and deferment can give you some much-needed breathing room during a recession, but a more affordable, long-term solution would be a better option. As an alternative, you may be able to switch to an income-driven repayment (IDR) plan. Under one of these plans, your monthly federal student loan payments would be commensurate with your income. If you’re unable to afford your current repayment plan, consider switching to a new one that offers a lower payment.

While it isn’t guaranteed, a private lender may also offer forbearance and deferment options, in addition to other forms of short-term financial relief. If you’re struggling to manage your private student debt, it’s worth checking with your lender to determine what repayment assistance programs it may have available.

Lastly, you may be able to save a little extra money by leveraging any autopay interest rate deductions offered by your lenders. These deductions are often small (for federal direct loans, it’s just 0.25%), but when you’re facing a financial hardship, anything you can save will make it easier to scrape by.

Strategies to Help You Manage Loan Payments

Outside of these resources, there are also a few strategies that you can employ to help you better manage your monthly payments. One approach, known as the debt avalanche, requires prioritizing the student loan with the highest interest rate. You’ll put a little extra each month toward that loan, while only paying the minimum required amount on your other debts. Once you’ve repaid the first loan, you’ll then do the same for whichever one has the second-highest interest rate—and so on and so forth.

Alternatively, you can put that extra payment toward whichever loan has the smallest balance. This method, known as the debt snowball, likely won’t save you as much in interest. However, since you’ll be eliminating individual loans more quickly, it can be a good option to help you stay motivated. Whichever strategy you use, have the excess amount put toward paying the loan’s principal, not the accrued interest, if possible.

It may not be feasible for you to regularly make extra student loan payments during a recession. However, when you pay down your loan’s principal balance, it reduces the amount of interest that can accrue each month. As such, making even a single extra payment when you can afford to do so during an economic downturn will put you in a better position. For example, if you’re able to put a little extra toward your student loan payment one month, your next minimum monthly payment should be lower, giving you more room in your budget in the months to follow.

The Bottom Line

When a financial hardship seems to be on the horizon, it’s worth knowing what your options are for keeping your student loan debt from spiraling out of control. Proactive management of your finances is crucial to ensure you can appropriately budget for your student loan payments—and avoid the financial consequences of failing to do so.