Students are going more into debt every year with student loans. Tuition rates have skyrocketed over the years. Many students graduate with a pile of debt that they will struggle for years to pay. In today’s tough job market where it’s difficult to find work, students find themselves in a tough spot.
The Statistics
According to the Federal Reserve, student loans (federal and private) totaled almost $830 billion in June 2010. There is $605.6 billion in federal student loans and $167.8 billion in private student loans outstanding. It’s estimated that $300 billion in federal student loan debt occurred in the past 4 years.
For the first time in history, in 2010 student loan debt in the U.S. has surpassed U.S. credit card debt. 1 in 14 graduates who started paying their federal student loan between 10/07 and 9/08 defaulted on their loan debt by 9/30/09.
For-profit colleges have the highest percentage of student loan debt and the highest average debt. The average debt for a 4-year public college is $20,200, for a 4-year private non-profit college it’s $27,650 and for a 4-year private for-profit college, it’s $33,050.
The national average debt for seniors graduating with loans has increased from $18,650 in 2004 to $23,200 in 2008.
Over 40% of college graduates don’t pursue a graduate education because of the amount of money they owe in student loans.
Since 1993, the number of students graduating with at least $40,000 with student loan debt has increased 10 fold.
Paying Off Your Student Loans
If you financed your education with a federal student loan, you must repay the loan six to nine months (depending on your specific loan) after you graduate, stop attending school, or drop out of school. Use the grace period wisely to start preparing for how you plan to pay back the loan.
Choosing a Plan
During your payment grace period after your graduate or leave school you can choose 1 of 4 repayment plans to repay your Direct or FFEL student loan. The plan options offer different payment options and lengths of time to pay back the loan. If you don’t choose a plan, you will place automatically placed it in the standard plan.
After choosing a plan, you may switch to a different one if your financial circumstances change. You may switch as often as you like if you have a Direct Loan, but if you have an FFEL loan, you can only change once per year.
If you have a Perkins Loan, your school will determine the number of your monthly payments based on the amount of loan and your loan repayment period, which is no more than 10 years.
If you have a Direct Loan, you will have the following options:
Standard Plan – This plan is similar to a traditional bank loan, where every month for a period of time (up to 10 years), you repay a fixed payment of at least $50 until the loan is repaid with interest. The monthly payments are higher with this plan; however, the total amount of interest you will pay is less.
Extended Plan – This plan is similar to the Standard Plan, however, you have 12 to 30 years to repay the loan depending on how much you owe. The monthly payment for this plan is lower than the Standard Plan but you will pay more interest over the time frame of the loan.
Graduated Plan – This plan starts your monthly payments out small but gradually increase to a certain amount over time because it’s assumed that when you first graduate from college you can’t afford to pay much but your income should increase over time. Normally, you will get 12 to 30 years to repay your loan depending on the total amount of money you owe.
Income-Contingent Plan – This plan recalculates your monthly payments every year based on the adjusted gross income you reported on your previous IRS tax return. The total amount of your student loan, the interest rate, and your family size are used to determine your monthly loan payment amount.
If your income is very low in a particular year, you may not have to pay anything; however, interest will continue to accumulate causing your debt to grow larger.
If you have an FFEL loan, you have the following options:
Standard Plan – This plan works just like the Standard Plan for a Direct Loan described above.
Graduated Plan – This plan works just like the Graduated Plan for a Direct Loan described above.
Extended Plan – If you owe more than $30,000 in the FFEL loan, you may use to plan because you get up to $25 years to repay the loan with your payments being fixed or graduated.
Income Sensitive Plan – This plan works just like the Income Contingent Plan for a Direct Loan described above.
If you need help in determining which plan is good for you, use the DOE’s interactive calculators at www.ed.gov/offices/OSFAP/DirectLoan/calc.html.
Avoiding a Loan Default
When your loan grace period ends, you must start to repay the loan. If you can’t make the payments, you should immediately make arrangements to pay the loans back or you’ll be in default. If you don’t keep up with your loan payments you will also be in default.
If you have a Direct or FFEL loan and you are 270 days behind in your payments, you will be in default. If you are repaying the loan on a different schedule you will be in default after 330 days. With the Perkins Loan, you are in default after just missing 1 payment.
The consequences for defaulting on your federal student loan are serious. They include:
- Your credit report will be damaged.
- Your wages may be garnished depending on whether your state allows it.
- You may be sued by your lender.
- Your loan may be given to a debt collection agency.
- You may be denied a professional license depending on if your state allows it.
- The full amount of your loan may be due immediately.
- You will not be eligible for loan forbearance or deferment.
- You will not be eligible for additional federal financial aid.
- Your federal and/or income tax return is seized and applied to the balance of your loan.
To avoid default if you run into problems with making payments is to immediately contact your lender to work out an agreement or strategy such as switching to a less expensive repayment plan. If this doesn’t work, you can pursue a loan deferment or forbearance or file bankruptcy to avoid a default.
If you have multiple student loans and have already defaulted on one or more, you may avoid default if you consolidate the loans to lower your payments. Contact your lender to determine if student loan consolidation is an option.
Deferring Payments
If you run into problems repaying your federal student loan, you may request a loan deferment which stops your loan payments for a limited period of time which is normally no more than 3 years. You will not have to make a loan payment within this time.
If your loan deferment is an unsubsidized Stafford Loan, interest will accrue during the deferment period. You will end up owing more at the end of the deferment period unless you make an interest payment each month.
The process differs with lenders on how to apply for a loan deferment but it usually involves completing an application and you must meet certain eligibility requirements. Typically, for you to be eligible for a loan deferment you must meet at least one of the following requirements:
- You lost your job.
- You are in the military.
- You are enrolled in an eligible school at least half-time.
- You will financial hardship if you make loan payments.
- You are in a graduate fellowship program.
If you are still paying on a Stafford Loan received before 7/1/1993, you may be entitled to a loan deferment other than the reasons listed above.
While waiting to hear if you are approved/denied a loan deferment, you must continue making payments to avoid a loan default. If your loan goes into default, you will not be eligible for a loan deferment.
For additional information about the terms and conditions to qualifying for a loan deferment visit the DOE’s Federal Students Aid website at studentaid.ed.gov and click on “Publications” on the right of the page and scroll down to find the publication titled “Repaying Your Student Loan”.
Loan Forbearance
If you are unsuccessful in obtaining a loan deferment, you may be able to use forbearance to avoid a loan default. Forbearance will postpone your loan payments or reduce the loan to a specified period of time, normally 1 to 3 years.
You will have to pay interest on the loan during the forbearance time-from but you can have the accrued interest added to the outstanding balance of the loan.
Obtaining forbearance, you have to apply with your lender and prove that you qualify to get a temporary break from your federal student loan obligations. A possible reason for obtaining forbearance includes but is not limited to the following:
- Personal reasons, such as poor health, make it difficult for you to make monthly payments.
- The monthly loan payment is greater than 20% of your gross monthly income. This applies only to certain types of federal student loans.
- You have a medical/dental residency or internship.
Bankruptcy
If you have tried everything to avoid loan default, your last option may be to consider bankruptcy. You must have serious financial problems and you must prove to the court that you made a good faith effort to repay the loan. You may try first filing for a “hardship discharge”, however, this is difficult to obtain.
If you apply for a hardship discharge, you must attend a court hearing with a bankruptcy judge who determines if you qualify. Your lender also attends the hearing if they object to the hardship discharge.
If you are denied hardship discharge, you may still file bankruptcy to avoid a default. If you file Chapter 7 liquidation bankruptcy, you will not have to make payments while you are in the bankruptcy process.
However, you’ll be expected to make payments when the bankruptcy process is over. Since Chapter 7 eliminates other types of debts, you should be in a better financial position to repay your student loan obligations.
If you file Chapter 13 bankruptcy, you will have 3 to 5 years to repay the remaining principal of your student loan. You will not be required to pay the past-due interest while you are in bankruptcy, however, you must pay it afterward. Additionally, you must pay all current student loan payments when due.
Loan Rehabilitation
If you defaulted on your student loan, you can undo the damage via loan rehabilitation. If you complete the loan rehabilitation process successfully, your loan will no longer be in default. The default information will be removed from your credit history, your wages will stop being garnished and you won’t have to worry about your tax refunds being seized. Additionally, you will be eligible to apply for future federal student loans and other types of federal loans.
To quality for loan rehabilitation, your lender must agree to a rehabilitation plan and the following:
- Loan payment amount during the rehabilitation period.
- A number of payments your must make. Normally 12 on-time consecutive monthly payments.
- When payments are due.
Details of your rehabilitation plan depend on the type of loan you defaulted on and the agreement between you and your lender. After satisfying the terms of your loan rehabilitation, you must resume paying the loan based on the terms of the original loan agreement.
If you rehabilitate an FFEL Loan, the DOE will make the loan available for purchase by the lending company that participates in the FFEL program. Your loan may end up with a different lender.
To find out more about loan rehabilitation contact the DOE’s Federal Student Aid Ombudsman at 877-557-2575 or visit www.ombudsman.ed.gov.
Student Loan Cancellation
Under certain conditions, if your loan is not in default, you may qualify for loan cancellation. This means your lender agrees to cancel all or part of your student loan. You must have a very good reason to request a loan cancellation and not just lose your job.
To be considered, you must prove one of the following:
- You can’t earn a living because you are totally and permanently disabled due to injury or illness. Your disability is expected to last indefinitely or may even result in death.
- Your school closed before you are able to complete your degree or within 90 days after you withdrew from the school. However, you will not qualify for loan cancellation if you are now completing your degree at a comparable school or if you completed your degree from a closed school.
- You are a full-time teacher working in a low-income area or teaching a subject that is in shortage. Find more information at studentaid.ed.gov and click on the “Repaying” tab and then click on “Cancellation and Deferment Options for Teachers”.
- You are pursuing a career in which there is a shortage of workers.
If you die, your family will not have to pay off your student loans. The lenders should cancel it.
If you don’t meet any of the scenarios listed above you may still qualify for full or partial federal loan cancellation or get loan-paying assistance if the following is true:
- Your state rewards students who pursue a specific degree. Your state may cancel these student loans or pay off some of the loans. To find out if your state has a program contact your state’s post-secondary education agency. To find your state’s agency call 800-433-3243 or visit studentaid.ed.gov and click on “Funding” and then “State Aid.”
- If you enlist in the military some branches of the armed forces use loan repayment programs as recruitment tools. To find out more, call or visit your local armed forces recruitment office.
- If you become an AmeriCorps volunteer, you may be able to cancel your student loans. AmeriCorps offers the opportunity for citizens to donate a year of their lives to work for a public agency, nonprofit organization, or faith-based organization to address a critical community need. For more information contact AmeriCorps at 800-842-2677 or visit www.americorps.org