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Paying off student loans in a recession

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College student takes notes in a lecture hall
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The economy in which you graduate dictates not only your job prospects but also your earning potential. According to a paper published through the National Bureau of Economic Research, those who graduated college right after the Great Recession of 2008 experienced lower employment rates and earnings through the first decade of their careers compared to those who graduated before the recession. This may explain why student loan repayment fell sharply during that period of time, as many graduates struggled to find good-paying jobs to keep up with repayment.

Although we’re not technically in a recession yet, there’s heavy speculation that that’s where we’re headed. Still, this time around may not be as bad for student loan borrowers as it was back in 2008; this is partly due to Biden’s student debt relief plan, which includes mass student loan cancellation.

But whether you’re a recent grad or have been paying your debt for years, it’s always best to be prepared. Here’s how to stay on top of your student loan payment if a recession hits.

Student loans during the Great Recession

Between December 2007 and June 2009, the U.S. experienced one of its longest economic downturns, known as the Great Recession, which peaked in 2008. During that time, many adults flocked back to college in hopes that a newly minted degree would be the path to a better job.

But there was one problem: Many of these adults enrolled at two-year for-profit colleges, which tend to have higher price tag than four-year public institutions. This means that they graduated college with substantially more debt than their peers who attended public institutions and who graduated a year or two before the Great Recession.

This, combined with fewer job opportunities and a lack of flexible student loan repayment options, caused student loan default rates to increase by as much as 17 percentage points between late 2006 and 2009, according to the Urban Institute.

Current state of student loans

Americans collectively owe a staggering $1.6 trillion in federal student loans — and counting. The Department of Education estimates that the average undergraduate student leaves school with $25,000 in student loans, and it’s a problem that’s affecting more than 45 million people from all walks of life.

In an effort to tackle the current student debt crisis, President Joe Biden recently unveiled a three-part student debt relief plan, which includes one-time student loan cancellation. Under this plan, borrowers earning less than $125,000 a year could see their federal student loan balances decrease by as much as $20,000, depending on whether they received the Pell Grant.

Kristin Blagg, senior research associate at the Urban Institute, says that this plan could be a key driver in avoiding another student loan default wave — like the one we had in 2008 — should we enter a new recession.

“Those who borrow small amounts of student debt — $10,000 or less — are more likely to struggle with delinquency and default, because this sometimes indicates that the borrower may not have completed the degree or certificate that they were pursuing,” Blagg says. “These low-balance borrowers are likely more vulnerable during a recession. If these borrowers have their loans forgiven, they will no longer be in the student borrower pool, potentially reducing the share of borrowers who drop out of current repayment due to financial difficulties in a recession.”

She also adds that Biden’s new proposed income-driven repayment plan, which would cap payments at 5 percent of a borrower’s discretionary income instead of the usual 10 or 20 percent, could also help borrowers remain current with their payments.

How to pay student loan debt in a recession

Recessions are marked by decreased economic activity, which usually causes massive layoffs or a reduction in working hours — all of which can have a negative impact on your wallet.

Derek Brainard, national director of financial education at AccessLex Institute, says that during times of economic crisis, your primary focus should be “simply doing what needs to be done to keep loans current and in good standing, rather than paying them off quickly.”  Here are some ideas you can explore to help you do just that.

Take inventory of your options

A key part of keeping your student loans current is knowing what relief options may be available to you in case of economic hardship.

If you have private student loans, lenders usually offer short-term forbearance or deferment for borrowers who are going through financial hardship. Although both of these alternatives will temporarily pause your payments, interest will continue to accrue during this time, which means that your payments could go up once they resume. Some lenders may also let you make interest-only payments for a few months. To find out your options, you’ll have to contact your lender or servicer.

For federal student loans, payments are currently paused — interest-free — until Dec. 31, 2022, so you have some flexibility. Likewise, federal student servicers also offer forbearance and deferment options, just like private lenders do, in addition to flexible repayment plans. You can apply for one of these options by reaching out to your servicer.

Apply for an income-driven repayment plan

One of the benefits of having federal student loans over private ones is that you have access to a variety of income-driven repayment plans. Under an income-driven repayment plan, your monthly payments are capped between 10 and 20 percent of your discretionary income and can sometimes can be as low as $0 if you’re unemployed.

To apply, simply log into your Federal Student Aid account and fill out the form. You can also contact your student loan servicer directly. Keep in mind that although income-driven repayment can make your payments more affordable, it will slow down your repayment process. However, if you have a balance at the end of your new repayment term, you could get the remaining amount forgiven.

See if you qualify for forgiveness

If you have federal student loans and work for a qualifying nonprofit or for a U.S. government agency at the state, tribal or federal level, you could qualify for the Department of Education’s Public Service Loan Forgiveness program.

With this program, you get the remainder of your federal student loan balance forgiven after making 120 payments on an income-driven repayment plan while working for a qualifying employer.

But even if you don’t work for any qualifying agencies, you can still get up to $20,000 of your federal student loan balance forgiven if you earn less than $125,000 a year, thanks to Biden’s one-time student loan cancellation.

To access this, you must fill out the application, which will be available early October and will remain open until Dec. 31, 2023. This could eliminate all of your debt — depending on your balance — or shave off a significant portion, making repayment easier on your wallet.

Consider refinancing

Refinancing consists of replacing your old loans with a new one. If you have good-to-excellent credit, refinancing your student loans could help you make your payments more manageable in two ways: by lowering your interest rate or by extending your repayment term. However, this last option means that you’ll pay more on interest over the life of your loan, as it will take you more years to pay off your balance.

It’s also worth noting that refinancing is mostly a good idea for private student loans, since refinancing your federal student loans would cause you to lose key benefits, like income-driven repayment and access to forgiveness.

Refinancing may also be a good idea if you have variable-rate loans, since you can lock in a fixed rate and protect yourself from further interest rate increases. This is especially true if you work in an industry that’s more vulnerable to layoffs during recession periods, such as travel and leisure, retail, manufacturing and real estate, since it can make your payments more predictable.

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Written by
Heidi Rivera
Heidi Rivera is a student loans writer for Bankrate. She began her journey in the personal finance space in 2018 and is passionate about collecting data and creating content around higher education and student loans.
Edited by
Student loans editor