Help for Those Struggling With Student Loans

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Help for Those Struggling With Student Loans

By Melissa Korn

Student loan payments can be a burden on even the best-paid among us, but with layoffs on the rise, those monthly bills are hurting a lot more people.

Defaulting on student loans can tarnish your credit score for years. Lenders can garnish wages, take tax refunds and Social Security checks, even go after your cosigner’s assets. And declaring bankruptcy doesn’t erase the debt. Those of us with federally guaranteed student loans (those of the Perkins, Stafford and PLUS varieties) will have more options than people with private loans. But there’s likely something out there for everyone struggling, whether because of unemployment, low salaries, disability or plain old bad budgeting.

Your first step should be picking up the phone.

“It doesn’t hurt to talk to the lender, to lay out your situation, and ask them what they can do,” says Mark Kantrowitz, publisher of financial aid Web site finaid.org.

Here are your options:

Deferment makes sense if you re-enroll in school at least part-time, join the Peace Corps or have a short-term cash crisis resulting from unemployment or another “economic hardship.” (Calculate your hardship eligibility here.) Interest is waived for subsidized Stafford and Perkins loans during the deferment period, which is typically one year, though it does add up for unsubsidized loans. Try to make interest payments during deferment; otherwise it will be added to the loan balance. Deferments of federal loans can be renewed for a total of three years.

You can also reduce or postpone payments via forbearance, but be sure to do the math before signing up for this option. Interest continues to accrue on all loans during forbearance (as opposed to only unsubsidized loans under deferment), meaning you could owe quite a bit more when all is said and done. “You dig yourself into a deeper hole,” warns Kantrowitz. Private lenders generally offer forbearance in three to six month increments for a total of one year; federal lenders grant forbearance for a year at a time for a maximum of three years.

Income-based repayment, being launched July 1, makes sense if your paycheck is small. It’s available to borrowers whose federal student-loan payments account for more than 15% of their “discretionary income”–the amount by which their adjusted gross income exceeds 150% of the poverty line for their family size. If your income is below 150% of the poverty cutoff, you’ll pay nothing; most people will pay less than 10% of their gross income. The government will cover some interest payments, and anything that’s tacked on afterward won’t hurt in the long run because loans are forgiven after 25 years. Check out this nifty calculator to compare monthly payments under a standard plan with those under the IBR plan. Learn more here and here.

You may be able to drag out payments beyond the original terms set in your loan agreement with extended repayment plans. Federal loans are usually set to be repaid over 10 years but can be extended for up to 25 years with this option. Private loans vary but generally have longer repayment periods to start with. You must have more than $30,000 in Direct or Federal Family Education Loan Program loans to even be eligible for extended repayment of federal loans. There’s a danger in extending your payment period, though: interest adds up. While you may lower your monthly payment, you could end up paying more–a lot more–in the long run. If you have federal loans, seriously consider the income-based repayment option instead.

Finally, many nonprofit employees, teachers, doctors and government workers are eligible for public service loan forgiveness. The federal government launched a program last year that forgives whatever federal loans remain after a decade in public work (you have to pay the loans during those 10 years, but payments may not be too painful thanks to the income-based repayment plan). A number of graduate schools have similar programs and require a shorter time commitment. Here’s a list of some major programs. Many states also have forgiveness programs, though funding is getting tight.