Solutions for Borrowers Who are Having Trouble Repaying Education Loans
April 21, 2009
There are many options for repayment relief for borrowers who are having trouble repaying their education loans. These include deferments and forbearances that suspend the monthly payment obligation, alternate repayment plans that reduce the monthly payments by increasing the loan term, and forgiveness and discharge programs that cancel the loans entirely. Which options are appropriate for you depends in part on whether your financial difficulty is short-term or long-term.
These solutions are mainly for borrowers of federal education loans, as options for borrowers of private student loans are more limited. The main options available to private student loan borrowers are short-term forbearances (suspensions of monthly payments) and an undue hardship bankruptcy discharge.
Talk to the Lender First
If you run into trouble repaying your loan, talk to the lender as soon as possible. Don’t procrastinate, as you lose options if you default first. For example, borrowers who default lose eligibility for deferments and forbearances. (Technically a borrower in default does not lose eligibility for forbearances, but in practice defaulted borrowers are unable to obtain a forbearance.)
Lenders have very strong powers to collect defaulted loans, such as garnisheeing up to 15% of your take-home pay, offsetting part of your Social Security benefits, seizing your federal and state income tax refunds and preventing renewal of professional licenses. They will get your money one way or the other even if you don’t talk to them. Failure to pay your loans on time will be reported to the national credit reporting agencies. This will hurt your credit scores and make it more difficult to get other types of consumer debt in the future, such as credit cards, auto loans and mortgages.
Ignoring the problem will just dig you into a deeper hole, since the interest continues to accrue. It won’t make the problem go away. So take steps to address the problem as soon as you start feeling financial stress. Do not wait for the problem to become unmanageable.
There is no shame in admitting that you are having trouble repaying your debt. In most cases such difficulties are caused by problems beyond the borrower’s control. Procrastinating will just make the problem worse.
It is also a good idea to get organized. Record all of your loans on a student loan checklist, including contact information for the lenders. If you forgot who holds your loans, visit FinAid’s Lost Your Lender? page.
Solutions for Short-Term Income Deficits
If you have a short-term financial difficulty, such as recent unemployment or medical leave, the economic hardship deferment and forbearances may provide some help. Each of these has a three-year limit for federal loans, and you must reapply each year. Since interest may continue to accrue and be capitalized, these can cause your loan balance to grow. (Private student loans typically offer only forbearances with a one year limit and in increments of 3 or 6 months. Private student loans may charge a per-loan deferment fee.) As a result, it is best to rely on deferments and forbearances only for problems lasting a few months.
The main difference between a deferment and a forbearance has to do with the treatment of interest on subsidized Federal Stafford loans. During a deferment, the federal government pays the interest on subsidized Federal Stafford loans, Federal Perkins loans and on the portion of a consolidation loan that paid off a subsidized Federal Stafford loan. (Consolidating a Federal Perkins loan, unfortunately, causes the borrower to lose the subsidized interest benefit.) The borrower remains responsible for the interest on an unsubsidized Federal Stafford loan and Federal PLUS loan. During a forbearance the borrower is responsible for the interest on all loans, including subsidized Federal Stafford and Federal Perkins loans. The interest continues to accrue and is capitalized, meaning that it is added to the loan balance. This causes the loan balance to grow larger and larger.
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