Solutions for Borrowers Who are Having Trouble Repaying Education Loans
April 21, 2009
Alternate repayment plans like extended repayment are able to reduce the monthly payments by increasing the term of the loan. While this may make the monthly payments more affordable, it does not save you any money as it will ultimately cost you a lot more in interest over the life of the loan. For example, an extended repayment plan that increases the loan term from 10 years to 20 years cuts the monthly payment by about a third (34%) but more than doubles the total interest paid over the life of the loan (118% increase).
The following table illustrates the impact of alternate repayment plans on the monthly payment and total cost of the loan as compared with standard 10-year repayment on a Federal Stafford loan.
and Loan Term
Total Interest Paid
|Extended Repayment – 12 years||12%||22% (factor of 1.22)|
|Extended Repayment – 15 years||23%||57% (factor of 1.57)|
|Extended Repayment – 20 years||34%||118% (factor of 2.18)|
|Extended Repayment – 25 years||40%||184% (factor of 2.84)|
|Extended Repayment – 30 years||43%||254% (factor of 3.54)|
Unfortunately, options for repayment relief on private student loans are more limited because they start off with a longer repayment term, typically 20 or 25 years. Increasing the loan term on a 20-year loan with a 10% interest rate to 30 years cuts the monthly payment by 9% but increases the total interest paid over the life of the loan by 64%. (On a 6% interest rate loan the reduction in the monthly payment is 16% at a cost of a 61% increase in total interest paid. On a 14% interest rate loan the reduction in the monthly payment is almost 5% at a cost of a 65% increase in total interest paid.)
Federal education loans can be discharged or cancelled in a variety of circumstances. These include:
- Closed School Discharge. If the college closed while you were in attendance or up to 90 days after you withdrew.
- False Certification Discharge. If the college improperly certified your ability to benefit from a higher education or you are the victim of identity theft.
- Death Discharge. If the borrower (or the student on whose behalf a parent borrowed a Federal PLUS loan) dies.
- Total and Permanent Disability Discharge. If a doctor certifies that the borrower is totally and permanently disabled, the loan will be subject to a 3-year conditional discharge. At the end of this period the loans may be permanently discharged.
If any of these circumstances apply to your federal loans, contact the servicer to obtain the necessary forms. You can also call the US Department of Education at 1-800-4-FED-AID (1-800-433-3243) or TTY 1-800-730-8913.
Most private student loans do not include loan cancellation provisions. Some, however, have a compassionate review process in which you can request a cancellation of the loan after the death of the student or total and permanent disability. Often the decision will depend on whether there is any reasonable prospect for repaying the debt. Families that enlist the assistance of members of Congress or the news media are often successful in getting private student loans cancelled if the unfortunate circumstances are severe and noteworthy, such as a borrower being killed in action while serving the country in the military or public safety.
There are a variety of federal and state loan forgiveness programs which will cancel part of a student’s education debt in exchange for public service, volunteering and military service. You can also get loan forgiveness for service in an area of national need, such as teaching, practicing medicine or serving as a public defender or prosecutor. Some of these are up-front forgiveness programs, in which a portion of your loans are forgiven after each year of service. Others are back-end forgiveness programs, in which your remaining debt is forgiven after several years of service. See Loan Forgiveness on FinAid for additional details.