A growing number of college graduates are behind on their student loans. The U.S. Department of Education estimates this problem to dramatically double in the next few years if the student debt situation is not brought to the forefront of conversation and dealt with.
Default is a poor outcome. It means a red-flag credit report, garnished wages, confiscated tax returns and possibly being sued. In the last couple years, the student loan debt has brought the attention of lawmakers to radically provide some kind of reorganization for loan relief.
On top of this, some borrowers are openly discussing their intentions to disregard payments completely. One such person, Lee Siegal, wrote about his decision to not repay his student loans in the New York Times “I chose life,” he wrote in his column and continued to say “That is to say, I defaulted on my student loans.”
It is a universal hopelessness catching fire. Weary borrowers struggle to keep up. Yet student loans cannot be ignored, as the life consequences can be severe and felt harshly for the future. So what can be done?
Here are the five steps to take when you are broke and have student loan payments:
- Let the lender know.
- Ask about payment plans.
- Investigate payment postponement options.
- Research loan cancellation and forgiveness.
- Dig out of default.
The most important first step is to contact the lender. They have to know the situation in order to provide easier avenues for the borrower.
As scary as it may seem, pull your credit report right away to see what you are dealing with. Many borrowers don’t even know what they owe or the status of their loans. The credit report lays it all out in plain sight. Also, get your free annual credit reports because you need to know which loans are being reported by whom. Then get your credit score. You can get a free credit score using a service like Credit.com. You will want to see how this debt is affecting your credit. You can track down your loans at the National Student Loan Database .
Once you contact the lender, there are several options to gain student debt relief:
- Defer Payments. Federal student loans come with an automatic six-month grace period before repayment begins. After this, you can apply for a deferment if unable to start making payments. It is easy to qualify for this deferment and can be done repeatedly if needed. However, interest is still accruing on the loans. Compounding interest is no friend. What starts as a realistic balance can balloon over time into an even more unmanageable debt. Deferment helps temporary but it is not a permanent solution. To apply, go to at www.nslds.ed.gov and find your loan servicer.
- Forbearance. Forbearance is another option, especially if you do not qualify for deferment. This avenue of relief can last up to a year, during which time repayment is stopped. Once again, the interest still accrues on the loans. In order to qualify for forbearance you must be able to show some kind of financial hardship. Supporting documents may be asked for to support your hardship claim. This application can also be found at www.nslds.ed.gov
- Income-Based Repayment. The Income-Based Repayment plan or IBR, is a repayment plan which works for individual situations well. The payments are usually set at 10 percent of income for borrowers, and after 25 years the balance on the loans is forgiven. Plus, public service workers can apply for loan forgiveness if they are enrolled in IBR.
If your loans are already in default...
- Loan consolidation. Default occurs after missing payment for more than 90 days. At this junction, debt collectors are most likely already calling for payments. This is a good time to consolidate your debt. By combining all the loans and getting a new repayment plan may be beneficial to the successful outcome of paying the loan off. You can apply for a new direct consolidation loan with the U.S. Department of Education.
- Loan rehabilitation. Rehabilitation is another way to pull up from student loan default. The lender can set up a payment plan based on your own financial situation. After nine months of solid, on-time payments they will correct the default status off your credit history. At this point, you could qualify for deferment and forbearance again. To apply for this manageable option, contact your loan servicer and ask to speak with their Special Assistance Unit. If they are unwilling, you can also file a complaint with the Federal Student Aid Ombudsman Group at the U.S. Department of Education.
Private loans carry another kind of dreaded weight. There are not a whole lot of available options other than repayment. You may be able to negotiate a different repayment plan or settle for a lower pay-off sum. Keep good records of all interactions between any loan providers you deal with. If any collector is threatening, know this is not allowed and can be solved through your state's Attorney General's office or by filing a complaint with the Consumer Financial Protection Bureau.
Most people know by now there is a student loan debt crisis in the United States. Programs are being spun to try to address the growing college debt concern. This awareness is on the borrower’s side. It is better to take the upper hand and be proactive on loans, then to be an ostrich and bury your head in sand in hopes the debt goes away. It won’t.