Student Loan Repayment Options

What To Do If You Can't Repay Your Student Loan

In 2002, a college graduate had an average of about $17,000 in federally guaranteed student loans. Whether you like it or not you have repay these loans, even if you don’t graduate or have trouble getting a job.

Student loans are not dischargeable in bankruptcy. The government has just reaffirmed this in the 2005 Bankruptcy Reform Act which also added more forms of financial aid - to trade schools and the like - to the non-dischargeable list. All private student loans are now on this list.

Last year, the US Supreme Court did not accept a hardship argument by a retiree whose Social Security checks were being reduced to repay his unpaid student loans.

That's right. If you don't repay your federally guaranteed student loans, you will have your Social Security cut when you retire.

Congress has declared it a matter of public policy that these loans must be repaid.

If you find yourself in a sinking rapidly under the weight of student loan debt, you do have a few options. This is where the flexibility of the Federal loan plans comes into play. If you’re having trouble repaying your Federal student loans, you can lower your payments by changing your payment plan, applying for deferment or forbearance or applying for a loan consolidation to lower your monthly payments. All this can be done online on the SallieMae website.

You don’t want to get in trouble with student loans. It’s unlikely you’ll discharge them in bankruptcy. In the meantime, late payments and defaults will be reported to the credit bureaus, your wages will be garnished and you tax refunds withheld and you can be sued.

So if it looks like you’re heading for trouble negotiate before you are in default or delinquency. If you wait too long, you lose whatever options you have to renegotiate your debt.

First look into changing your payment plans. Using income sensitive payments you can reduce your monthly payments by up to 35% a month. You pay a percentage of your income every month. As your income rises, so does your payment.

If you have more than $30,000 in debt, you can extend payments over 25 years. The monthly payment is lower, but you'll wind up paying more interest.

After that, the three mains options you can apply for are deferment, forbearance and consolidation.

Deferment allows borrowers under certain conditions to postpone loan repayment for specific periods of time.

Eligibility for deferments differ based on when you received the funds. If the loan was first disbursed before July 1, 1993, your account will be eligible for certain deferments. Your account will be eligible for a smaller group of deferments if your first loan was disbursed after July 1, 1993.

For loans prior to 1993, the following are causes for deferment:

• In-School Full-Time or Half Time Student
• Unemployment (you have to be looking)
• Internship/Residency
• Graduate Fellowship
• Temporary Total Disability
• Active Duty in the Armed Forces
• Public Health Service
• National Oceanic and Atmospheric Administration (NOAA)
• Peace Corps
• ACTION Programs
• Tax-Exempt Organization
• Rehabilitation Training
• Parental Leave
• Working Mother
• Teacher-Shortage Area

After 1993, the allowable deferment options were drastically cut:

• In-School
• Unemployment
• Rehabilitation Training
• Graduate Fellowship
• Economic Hardship

A deferment must be granted if your loan is not in default or, if your loan is in default, the deferment began prior to the default date. You have to provide the documentation required by law.

For subsidized Stafford loans, the government pays the interest that accrues during the deferment and forebearance periods. For other loans, including unsubsidized Stafford loans, interest accrues during deferment or forbearance. You can capitalize the interest – add it to principal, but it’s best to pay the interest to keep your debt from growing.

Deferments are granted for a temporary period, usually not longer than one year. If you've already had one deferment, you may be eligible for the same type again.

In some cases, you may have exceeded the time limit on a particular deferment and may no longer be eligible to apply for the same type of deferment.

Forbearance is a lot like deferment. It is a temporary delay or reduction of loan payments agreed to by the lender and borrower.

Interest continues to accrue during forbearance. This can be an option for borrowers having temporary financial difficulty. A forbearance is granted in increments for up to one year.

Mandatory Forbearance is available to those whose loan is not in default. A lender is required to grant forbearance for medical or dental internships and residencies after the borrower's in-school deferment period has expired; for service in AmeriCorps; for excess student loan debt burden; for participation in the student loan repayment programs as administered by the U.S. Department of Defense; and for non-medical or dental internships.

Forbearance is also required for periods during which the borrower is involved in a local or national emergency or military mobilization or resides in a designated disaster area.

A lender is also required to grant a mandatory administrative forbearance for up to three years if the borrower's repayment period must be extended due to the effect of changes in the variable interest rate on standard or graduated repayment terms and for up to five years to accommodate income-sensitive repayment schedules.

Loan consolidation is a way to reduce your monthly payments by up to 50%. With consolidation, you refinance one or more education loans. The original loans are paid in full and a new loan for the combined balance is originated, for a new term, and often with a lower interest rate.

Although, that your monthly payment may decrease, it will take longer to pay off your loan and you'll pay more in interest.

But with consolidation you may be able to lock in a low fixed interest rate (most student loans are variable to a cap). It is most useful if your education debt is high. All outstanding loans are combined using an interest rate that is the average of the loans.

You can then repay using a graduated repayment plan, extended repayment, or income-sensitive repayment. If you are a participant in a Stafford, Perkins or PLUS loan, you can extend payments for up to 30 years.

Finally do not ignore you student loan obligations. As I mentioned before, the US Supreme Court ruled that the government can cut your social security payments in order to collect unpaid student loans. This is a debt that will never go away.

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