Pay student loan debt or utility bill?

Too many single moms are stuck in the position where they have to decide whether to keep up with student loan payments or pay their household expenses…and something has to give. For many single moms, it just seems easier to stop making student loan payments…but that can lead to serious financial consequences unless you do it the right way.

What can go wrong?

Here’s what happens when you stop making student loan payments.
Day 1: You’re delinquent.
Day 270 (9 months): You’re in default.

Default is worse than delinquent…but both can have significant negative impacts on your long-term finances.

  1. Your loan balance will get bigger. The interest portion of every payment you miss gets added to your student loan balance. That has the effect of also increasing the interest due, so the amount you owe can spiral out of control further and faster.
  2. Your credit score will suffer. The moment you’re late with a student loan payment, the loan servicer (the company you send the payments to) can – and often will – report that to the credit bureaus. Every late or missed payment takes a bite out of your credit score. That can make it much harder to refinance or consolidate your debt, and nearly impossible to get the best interest rates when you do.
  3. Fees, fees, fees. Once your student loan payment is late, fees start stacking up. Late fees can run from 5% to 10% of the missed payment, so a single late $400 payment could cost you an extra $40 in fees, and those fees keep coming with every late or missed payment. And if your loan gets turned over to a collection agency, they can hit you with super high fees, ranging from 20% to 40% of your loan balance.
  4. Default makes things really bad. If you miss 9 months worth of payments, landing you in default, you may face even bigger problems…

If you’re thinking about skipping a student loan payment – or you’ve already missed some – here’s a better step to take.

What you can do if you can’t make the next payment

If your budget is so tight that you just can’t make your student loan payment, CALL YOUR LOAN SERVICER RIGHT AWAY. I know that feels scary, but admitting there’s a problem and taking responsibility for it will go a long way toward the servicer giving you a break.

In fact, they’re often able and willing to help you get back on track. Sometimes all it takes reducing your monthly student loan payment to something you can more easily afford. But if that’s not enough to help you out, you can go a step further…

You are not alone! Millions of single moms struggle with this very same problem, because student loan debt affects us more than anyone else. When I listened to these stories on the Sex, Death & Money podcast, so many of them sounded familiar: the shame, the fear, the anger. And the stories of people who made it out were really inspirational. You can listen to their special coverage of student loan debt here.

For stopping payments all together, the two main choices are deferment and forbearance. Both options pause monthly payments…but not your interest. Some lenders let you choose between making just monthly interest payments OR adding all of the interest charged during the pause period on to your loan balance. Another benefit: Your credit score won’t keep taking hits for missed payments under either plan.

If making student loan payments causes an economic hardship, you may qualify for loan deferment, which puts your payments on hold for up to three years. And depending on your circumstances and your lender, you might not have to pay back the interest that builds up during the pause period.

Even if you don’t qualify for deferment, you may be able to get loan forbearance, which lets you stop making payments for up to one year. If you’re facing financial hardship, this gives you a chance to get your finances back on track without having to deal with the fallout of loan default.

In either case, you’ll have to make payments until you get a deferment or forbearance acceptance from your loan servicer. And, yes, you’ll still have to (at least in most cases) pay all of that extra interest…but that’s better than going into default and trashing your finances for years to come.