Falling behind on federal student or parent loan payments can be terrifying. Your credit scores drop, which can cut off opportunities to buy homes, go back to school, or get credit cards. Bankruptcy judges generally won't clear the debt, and the government can take part of your paychecks and even
Here are 11 steps to get at least temporary financial relief while preserving good credit ratings:
Gather and keep good records of all phone calls and save copies of all paperwork and E-mails.
2. Determine your loan type.
Look at your documents and, if necessary, call your lender to figure out what kind of educational loans you are having trouble with. This can be harder than it sounds. Through
3. Determine who to call.
You can get the name and contact information for your loan servicer by checking with the federal government or calling 1-800-4-FED-AID. Don't just call the company or school that gave you your loan. Most lenders sell their loans to investors, and hire companies called "servicers" to handle billing. If you've missed several payments, the servicer may turn your account over to a collections agency. In addition, those who have missed some payments often get calls from insurance companies, called guarantors, that backs many student loans. Borrowers generally need only deal with their servicer or collection agency.
4. Check the timing.
People who haven't yet missed any payments have the easiest time of decreasing their monthly payments or getting permission to skip some payments, as costs and hassles rise the longer borrowers avoid paying. Lenders can add late feesof up to 6 percent of each monthly bill for every missed payment. It's still comparatively easy to get relief if you start negotiations before you've missed your ninth payment (or are less than 270 days late). After that, however, you're considered in default which means your credit rating plunges and you cannot receive any additional federal financial aid for college. Collection agencies can confiscate tax refunds or other government payments owed to defaulters, and they can garnish up to 15 percent of defaulters' wages. Lenders can add collection fees of up to 25 percent on most federal education debts starting 60 days after default. Those who default on Perkins loans can see their debts jump by collection fees of up to 40 percent.
5. Know what you want.
If you could keep current with smaller monthly payments, check out the various payment plans, including "graduated repayment," which gives low monthly payments for a few years then gradually ratchets up, or the new "income-based repayment," which caps payments below 15 percent of your income. After 25 years of income-based payments, any remaining debt is forgiven. If you're having money trouble because you're a low-paid public servant, make plans to consolidate your loan directly with the federal government and sign up for IBR. After 10 years of payments, the government will forgive the rest of your debt -- but only if you have signed up with IBR directly with the federal government.
If you believe you can't afford to make any payments for a while, check out the deferment and forbearance options. Both programs allow borrowers to skip payments for up to three years. But borrowers should generally try for deferment first, since lenders must grant deferments to all qualified borrowers. And subsidized Stafford or Perkins loans suspend charging additional interest during deferments, so those debts don't keep growing. (The other kinds of loans do keep growing, however.) Lenders can choose whether or not to award forbearances, on the other hand, so those negotiations can be more difficult. Borrowers with incomes below 150 percent of poverty who want to skip payments can also consider signing up for IBR, since they won't be required to make monthly payments.
If you think you can't, or shouldn't have to ever pay off a federal education loan, you can try for a complete discharge. But those are generally limited to people who've become permanently disabled, or were victims of loan or educational fraud.
6. Determine what's causing your financial problems.
Figuring out the reasons your money runs out before the end of the month can help identify the best solution. If you're having trouble because you are working in a low-paid public service job, consider consolidating your loan directly with the federal government, signing up for IBR, and hoping for some debt forgiveness in 10 years.
If you are having trouble because you have returned to school at least half time, are ill, are caring for an ill spouse, are a new parent, are serving in the military, or have joined the
If you are having trouble because you've lost a job or suffered a drop in income, see if you qualify for an "economic hardship" deferment. The government permits borrowers in severe financial difficulties to skip payments for up to three years. If you don't qualify for a deferment, you may be able to persuade your lender to grant you forbearance.
7. Take responsibility.
Be realistic about your obligations and the rules. If you stopped paying because you moved and didn't receive a bill, don't expect much help. Borrowers are responsible for notifying lenders of moves and making payments. If the lender made a mistake on a bill, by, for example, failing to credit payments, you'll have to provide proof of your payments. If your debt seems much more than you borrowed, remember that most loans -- subsidized Stafford and Perkins loans are typically the exceptions -- keep accruing interest while you are in school or while your loan is in deferment. All types of federal loans accrue interest in forbearance. It is almost impossible to escape paying student loans, even if you file for bankruptcy, so it's in your best interest to try to reach a resolution as soon as possible.
8. Learn your rights.
Unfortunately, some collection agency employees are poorly trained, or may have financial incentives to pressure you into paying faster or paying more than you can afford.
9. Propose a reasonable solution.
Generally, delinquent borrowers can switch to more affordable payment plans or win deferments without having to make any payments first. The government can also award retroactive forbearances or deferments to wipe away current delinquencies, though collectors may ask for evidence of a good reason, such as unemployment. The federal government allows its collectors to waive collection costs and knock as much as 10 percent off of the total debt for those who prove that's all they can afford and who make good faith efforts at repayment. Such discounts are left to the discretion of the servicer or collector, however.
10. Try to fix your record while you wait for a final agreement.
Lenders typically urge borrowers to keep making payments during negotiations. But borrowers who can't make payments can ask for retroactive deferment or forbearance.
11. Get help.
If you're having trouble with your collection agency or servicer, call the
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Personal Finance - Steps to Relief From Federal Student Loans
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