How To Dig Out Of Student Loan Debt When You Cannot Pay

by Hank Coleman

With the cost of education rising every year, more and more students face no alternative but to take out loans to get through college.  And with the current state of the economy and the large numbers of college graduates in the job market, many people find themselves unable to pay on their student loans which end up in collections.  However, there are ways graduates can get themselves out from under their student loans with a little work.

What Kind Of Loan? The first thing every graduate faced with student loan problems is to determine what kind of loans they have.  Student loans are first divided in to broad categories, government and private loans.  Private loans are from a private lender, usually a company.  Government loans are provided by the Federal Department of Education. Private loans used for education are the same as any other loan.  A student pays the same interest rate on a private loan as any other consumer and does not get any special treatment under the law.

However, if a student takes out Federal loans, the situation is better.  There are a variety of different loan programs offered by the Federal government, including Stafford loans.  There is also the Perkins loan program, the PLUS loans, the Federal Family Education Loan Program (FFELP), and the William D. Ford Direct Loan program (Direct loan program).  The last two loans are not borrowed by the student, but the student’s parents.  Unlike private loans, all Federal loans are disbursed directly to the school and not to the borrower.

Stafford loans are by far the most popular and the best known of Federal Student Loan programs, usually because of the hassle every student and their family goes through every year to fill out their FAFSAs.  Stafford loans are divided into Subsidized and Unsubsidized Stafford loans.  Subsidized Stafford loans are based on financial need and interest does not start accruing until the student graduates.  Unsubsidized Stafford loans are available to any student who is enrolled on at least a half-time basis, and the student will be charged interest from the time the loan is disbursed.  One advantage Unsubsidized Stafford loans have over Subsidized Stafford loans is the tax advantage to paying interest on student loans.  Any interest paid on any Federal Student loan is tax deductible to the party paying the interest in the tax year it is paid.  Government loans have some serious drawbacks. The first being, that if you get behind on your loans, the government does not have to take you to court in order to get a lien placed on your wages and other assets.  If you become delinquent on your loans you can also have your state and federal income tax refund withheld or taken to pay your loans.

Consolidate Loans. But, there are ways to avoid becoming delinquent on your student loans.  The first and best way is to choose your repayment option with care.  You can choose to make your payments in fixed monthly payments, fixed or graduated annual payments, or in payments based on your income.  These options are also available if you consolidate your loans.  Student loan consolidation is a good option for those graduates who have multiple loans from a variety of sources and would like to make one payment a month.  Loans can be consolidated once they have entered repayment and at least one loan must be in repayment, grace, deferment, or default.  Direct consolidation loans (loans given to the student and not through their parents) have fixed interest rates that cannot be more than 8.25%.  This interest rate is not determined by the market, like with a private loan, but is determined by the type of loans you are consolidating.

When looking at consolidation loans, even if you have other debts you want to consolidate, it is better to consolidate your student loans separately from your commercial debts.  Consolidation programs through the government for student loans are more favorable to the borrower than even low interest commercial consolidation loans. While this means you’ll be paying on two loans, your consolidated student loans and a debt consolidation loan, if you choose to consolidate your student loans with an income dependant plan, you can defer paying your student loans until you have repaid the consolidation loan.

Loan Deferment. The next option is to try to get your loans deferred.   Deferral is a temporary suspension of your student loan payments and if you have a Subsidized loan, the interest as well.  Deferment is allowed while the student is enrolled in at least a half time basis, an active member of the military, national guard, or reserve while on duty and for 13 months thereafter, or if the borrower can show they are experiencing economic hardship the loan can be deferred for three years.

Loan Forbearance. If you don’t qualify to have your loans deferred, you can also try to get forbearance.  Forbearance is a temporary postponement of or reduction of payments due to economic hardship.  Unlike with deferral, whether the loan is subsidized or unsubsidized, interest keeps accruing.  In addition, a lender is only allowed to grant you forbearance for 1 year at a time, for a maximum of 3 years.

Loan Forgiveness. If none of these options work to keep you out of default, you can try to enroll in one of the Federal government’s Public Service Loan Forgiveness Program.  This program is available for any direct loan, or any other loan consolidated with a direct loan after you have made 120 payments under your repayment plan while working full time for a qualifying public service employer.  A graduate looking to try to get into a Public Service Program should be aware that they may have to pay taxes on the amount of their loans that is forgiven.

Graduates facing default should also be aware that two of the options to get rid of their overall debt are not available for federal student loans.   The Department of Education Student Loan division will not negotiate a lower payment with a borrower accept through the Public Service Loan Forgiveness Program.  In addition, recent changes to bankruptcy law do not permit a debtor to get their student loans discharged in full or in part under any chapter of bankruptcy.

For more information regarding student loans and the options you have to repay, check out the Federal Department of Education’s Student Loan information website at http://federalstudentaid.ed.gov/students.html.

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{ 3 comments… read them below or add one }

Personal finance June 16, 2010 at 5:09 am

Student loans are increasingly becoming famous due to their easy availability. Its made students who want to pursue higher education to fulfill his dream. Repaying methods are various and depends on the situation. I personally would repay my student loan on the basis of my income. This gives me clear idea of how much I need to spend and save.

gary procojivch June 17, 2010 at 4:38 am

Great info i wish i had know some of this when i was paying off my student loans

jason June 17, 2010 at 4:39 am

Loan forgiveness sure would have com in handy a few years ago

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