Solutions for Borrowers Who are Having Trouble Repaying Education Loans
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.
The first step to solving your student loan problem is to get organized, so that you know the most important details about all your loans. Here are a few suggestions:
If you have lost track of your loans, use the National Student Clearinghouse's Loan Locator Service or the National Student Loan Data System's Student Access to obtain a list of all your federal loans. The financial aid administrators at your college can also help you.
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 deferment and forbearance options if you default first.
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. Failure to pay your loans on time will be reported to the national credit reporting agencies.
With that, talk to a lender as soon as you feel you’re having trouble making your payments. There is no shame in admitting this.
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. The economic hardship deferment has a three-year limit and forbearances have a five-year limit, and you must reapply each year. Since interest may continue to accrue and be capitalized, these can cause your loan balance to grow.
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. However, during a forbearance the borrower is responsible for the interest on all loans, including subsidized Federal Stafford and Federal Perkins loans.
The use of deferments and forbearances should be limited to short-term problems, such as unemployment after a job loss or in conjunction with medical leave.
To apply for a deferment or forbearance, contact the lender who currently holds your loans.
Solutions for Long-Term Income Deficits
If your financial difficulty is of a more long-term nature, such as a low-paying job that yields insufficient income to repay the debt and there's no possibility of getting a better job, consider one of the alternate repayment plans for federal loans such as extended repayment, income-contingent repayment or income-based repayment. This will be ultimately less expensive than relying on deferments and forbearances to avoid the problem. You can switch repayment plans once a year.
The income-contingent repayment and income-based repayment are also available to borrowers who have already defaulted on their loans, per sections 428(m) and 493C(b)(1) of the Higher Education Act of 1965. Defaulted borrowers may obtain a subsequent consolidation loan if the loan has been submitted to a guarantee agency for default aversion or if the loan is already in default, per section 428C(a)(3)(B)(i)(V)(aa) of the Higher Education Act of 1965. Defaulted borrowers are, however, ineligible for public service loan forgiveness.
The income-contingent repayment and income-based repayment are also available to borrowers who have already defaulted on their loans. Defaulted borrowers may obtain a subsequent consolidation loan if the loan has been submitted to a guarantee agency for default aversion or if the loan is already in default. Defaulted borrowers are, however, ineligible for public service loan forgiveness.
Federal education loans can be discharged or cancelled in a variety of circumstances. These include:
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.
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.
Solutions for Completely Unmanageable Debt
It is very difficult to get federal and private education loans discharged in bankruptcy. However, if your income is insufficient to both repay the debt using income-based repayment and provide for a minimal standard of living (e.g., you are living below 150% of the poverty line), this situation is expected to persist for most of the term of the loan and you made a good faith effort to repay the debt, you may be able to get an undue hardship discharge. It is generally a good idea to have first exhausted your other options for repayment relief and to have tried to cut your living costs.
Note that if you file for bankruptcy on debts other than student loans, some private student loans include a "universal default" clause which will make the loans due in full immediately.
Rehabilitating Defaulted Loans
If you defaulted on your federal education loans, but are now able to begin making payments on the loans, you may be able to rehabilitate the loans. This can remove the default from your credit history and let you regain eligibility for federal student aid. You must make arrangements with the current holder of the loan to repay the loan. After you have made six full and voluntary on-time payments over the course of six months, you will regain eligibility for federal student aid.
After you have made 9 of 10 consecutive payments within 20 days of the due date, you can apply to have the loan rehabilitated. If the guarantee agency is able to sell the loan to a lender, the loan will be considered rehabilitated and the default will be removed from your credit history. Call the US Department of Education's Default Resolution Group at 1-800-621-3115 or TTY 1-877-825-9923 for more information. See also Defaulting on Student Loans on FinAid for more information on defaulted education loans.
Help with Loan Problems
If you are having a problem with your federal student loan, contact the FSA Ombudsman at the US Department of Education. The FSA Ombudsman is dedicated to helping students and parents resolve disputes and other problems with federal education loans. The FSA Ombudsman will research your problem in an impartial and objective manner and will try to develop a fair solution. The FSA Ombudsman does not have the authority to impose a solution.
The Student Loan Borrower Assistance Project run by the National Consumer Law Center is another source of information and other resources for dealing with debt problems. They give suggestions on ways of negotiation with lenders for some relief and provide information about loan rehabilitation.
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