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Solutions for Borrowers Who are Having Trouble Repaying Education Loans

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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. (See also loan repayment protection. Unfortunately, you can't sign up for the commercial loan repayment protection programs after the fact.)

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Get Organized

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:

  • Put all paperwork for each loan in its own file folder.
  • Label each file folder with the lender name, date borrowed, initial amount borrowed and loan id.
  • Sort the correspondence within each folder chronologically.
  • Summarize the most important information on a student loan checklist.

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 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.

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. (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.

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. Typically it takes laid off employees 15-20 weeks to find a new job. Even though you could stack deferments and forbearances to get up to six years of repayment relief (and then consolidate the loans to get a fresh set of deferments and forbearances), this is not recommended because it can cause a big increase in the amount you owe. The following table illustrates the increase in the loan balance on a $10,000 Federal Stafford loan at 6.8% interest, assuming that the interest is capitalized monthly. It also illustrates the increase in the total cost of repaying the loan over the life of the loan, assuming a 10-year repayment term.

Increases in the Loan Balance from Capitalized Interest
$10,000 Stafford Loan at 6.8% Interest and a 10 year Term
Forbearance Duration Capitalized Interest Percentage Increase in Loan Balance Increase in Life-of-Loan Interest Percentage Increase in Life-of-Loan Interest
3 months $171 1.7% $236 6.2%
6 months $345 3.4% $476 12.5%
1 year $702 7.0% $967 25.4%
3 years $2,256 22.6% $3,115 81.8%
6 years $5,021 50.2% $6,933 182.0%
9 years $8,409 84.1% $11,613 304.8%
12 years $12,562 125.6% $17,348 455.4%

So while a short forbearance increases the life-of-loan cost by a negligable amount, a 3 year forbearance almost doubles the cost, a 6 year forbearance almost triples it, a 9 year forbearance quadruples it and a 12 year forbearance increases it by a factor of 5.5. With private student loans the increase in costs is even greater due to higher interest rates. When you hear about a $10,000 loan exploding into a $40,000 loan, it's usually because of an extended period of nonpayment followed by default (with 25% collection charges) and then by a slower than normal repayment trajectory.

The economic hardship deferment has a complicated set of eligibility criteria. But if you are unemployed or your income is below 150% of the poverty line or you are receiving support under a federal or state public assistance program (e.g., TANF, SSI or food stamps) you will most likely qualify. FinAid's Economic Hardship Deferment Calculator may be used to determine whether you are eligible for this deferment.

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 (more than a few months), 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.

Extended repayment increases the loan term based on the amount owed. If you have more than $30,000 in federal education loan debt with a single lender, you can get extended repayment of up to 25 years without consolidating your loans. If you consolidate your loans, you can get extended repayment of up to 30 years, depending on the loan balance. The following table illustrates the extended loan terms for federal loans that have been consolidated.

Extended Repayment
Loan Balance Maximum Loan Term
Less than $7,500 10 years
$7,500 to $9,999 12 years
$10,000 to $19,999 15 years
$20,000 to $39,999 20 years
$40,000 to $59,999 25 years
$60,000 or more 30 years

Another alternative repayment plan for federal loans is the income-based repayment plan (available starting July 1, 2009). This caps your monthly payment at 15% of discretionary income and forgives any remaining balance after 25 years in repayment. (If your loans are in the direct loan program and you work full-time in public service, the forgiveness occurs after 10 years in repayment.) Discretionary income is defined as the amount by which income exceeds 150% of the poverty line. Income-based repayment is especially helpful for borrowers who have high debt and low income relative to that debt. The income-based repayment program is available to defaulted borrowers. (Public service loan forgiveness is not available to defaulted borrowers.) In some ways income-based repayment functions like a deferment or forbearance, since if you have no income, your payment will be $0. But unlike the economic hardship deferment or forbearances, which each have a 3 year limit, there is no limit on the number of minimal or zero monthly payments. (There is, however, a 3 year limit on government payment of unpaid interest on subsidized Stafford loans in the income-based repayment plan. Also, this benefit is just for the unpaid interest that accrues, while the government pays the full amount of interest that accrues on subsidized Stafford loans in a deferment. However, if the borrower's AGI is less than 150% of the poverty line, the monthly payment will be zero and the unpaid interest will be the full amount of interest.)

To illustrate, suppose that you have an annual income of $35,000 and a family size of 3. The poverty line for a family of 3 was $17,600 in 2008, so 150% of the poverty line for the family size is $26,400. $35,000 in income exceeds this threshold by $8,600. 15% of this amount is $1,290. Dividing this figure by 12 yields a monthly payment cap of $107.50.

The income-contingent repayment plan is a little less generous than the income-based repayment plan. It caps your monthly payment at 20% of discretionary income and forgives any remaining balance after 25 years in repayment. As with income-based repayment, public service loan forgiveness reduces the forgiveness period to 10 years of full-time employment in public service. Discretionary income is defined as the amount by which income exceeds 100% of the poverty line. Income-contingent repayment is only available in the direct loan program. Borrowers who have defaulted on their loans can be required to repay the loans under the income-contingent repayment program.

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 typical 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.

Impact of Alternate Repayment Plans on Monthly Payment and Total Interest
Repayment Plan
and Loan Term
Reduction in
Monthly Payment
Increase in
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)

For most borrowers either extended repayment or income-based repayment will offer the lowest monthly payment on a long-term basis. Extended repayment is based on the amount owed while income-based repayment is based on income. So income-based repayment may be better when the borrower's income is low as compared with his or her debt.

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.)

Loan Cancellation

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.

Loan Forgiveness

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. If you satisfy these criteria there are about even odds of the bankruptcy judge granting you a full or partial discharge. You are more likely to get an undue hardship discharge if the financial difficulty was due to circumstances beyond your control. You are also more likely to get private student loans discharged than federal education loans, because the federal education loans provide more options for repayment relief. (For example, federal loans can be cancelled for total and permanent disability, while private student loans generally do not have such a cancellation provision. So a borrower with a disability may need to seek an undue hardship discharge.)

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. (Rehabilitation is also available for Federal Perkins loans and loans in the Direct Loan program.) 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 and student loan settlements for information on settling an old defaulted student loan for less than what you owe.

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. Nevertheless, many students have found the FSA Ombudsman to be helpful in resolving disputes with lenders. You can contact the FSA Ombudsman by phone at 1-877-557-2575, by fax at 1-202-275-0549, by mail at U.S. Department of Education, FSA Ombudsman, 830 First Street, NE, Fourth Floor, Washington, DC 20202-5144, or by email at fsaombudsmanoffice@ed.gov.

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, information about loan rehabilitation, and provide a list of the various guarantee agency ombudsmen.

 

 
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