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  • Options for Dealing with Student Loan Debt

    The average student from the class of 2010 has $25,250 in student loan debt, according to the Institute for College Access & Success in Oakland, California. Some graduates who fall into financial hardship are unable to make the monthly loan payments leading to a default on their loan. This can have serious financial consequences. For example student loan default can make you ineligible for additional federal student aid, federal and state income tax refunds can be withheld or it may even result in loan wage garnishment whereby your employer withholds a percentage of your wages for payment towards the debt. A default goes on your credit report and is similar to a charge-off, but unlike other loans student debt cannot be expunged in bankruptcy.

    Fortunately there are options available for graduates who are experiencing financial hardship as a result of student debt.

    Deferring and Forbearance

    If you fall into financial hardship and cannot repay your loan you may have the option of a deferment or forbearance. Forbearance allows you to reduce or halt payments for a set period of time. However interest still accrues on the loan for the period that payments are not made so you can end up in even more debt by the time the forbearance ends. Deferment is preferable to forbearance as the interest is paid for by the government while payments are put on hold. You only have about 3 years of deferment or forbearance until it is used up so it should only be used to prevent defaulting on a loan.

    Loan Forgiveness

    If you work for the government or in a public service job you are entitled to have your loan forgiven or erased after 10 years of service and 120 payments. Unfortunately only students who took out federal loans are entitled to loan forgiveness. These include Stafford loans, Federal Direct PLUS loans and direct Consolidation loans.

    Financial Hardship Payment Options

    If your income is low and you are struggling to make payments you may be eligible for one of the following plans.

    • Income Contingent Repayment Plan - The Income Contingent Repayment Plan calculates your payments based on your income. Your payments could be reduced significantly and any remaining loan payment after 25 years is cancelled.
    • Hardship Repayment Plans for Perkins Loans - Perkins loans are federally backed loans given to the poorest students. A Perkins loan means you can pay as little as $40 per month and payment can be stretched out over a longer period of time resulting in lower monthly payments.
    • Income Sensitive Repayment Plan - This plan is only available for the Federal Family Education Loan and means your payments are based on your annual income, total loan amount and family size.
    • Income Based Repayment Plan - You can get an Income Based Repayment Plan but it is only available for Direct Loans and Federal Family Education Loans. An income Based Repayment Plan offers more options than under the Income Contingent Repayment Plan or Income Sensitive Repayment Plan and payments can be lower. Also your debt is erased after 25 years of payments and you can pay back less than the accruing interest. However you cannot obtain an Income Based Repayment Plan if your loan is in default.

    Consolidation Student Loans

    Student loan consolidation is a way of consolidating or combining all of your federal student loans into a single loan with one monthly payment. This makes it easier to keep track of your debt and it can have the added benefit of reducing your interest rate and helping you get out of default.

    Cancelling Student Debt

    It some cases you can cancel your student loans or part of your loan if you meet specific criteria. For example you were enrolled in a school that closed while you were in attendance, false certifications where the college did not make sure that you were qualified before starting the course or you are unable to work due to illness or injury that lasts five or more years.

    For students who opted for a federal rather than a private loan there are a number of options available to make payment on a loan easier and less burdensome. Income based repayment, debt consolidation, and even cancelling student debt are some of the options for avoiding default.