REPAYING
FEDERAL STUDENT LOANS: Default, Cancellation, Postponement
& Rehab
Student
loans cannot be discharged even with bankruptcy. Continued
default can mean damaged credit, additional collection fees
of up to 25%, loss of tax refund, 10% loss of pay check, and
even law suits filed
against you. There's private student loans and federal
student loans. Both have different requirements.
Sounds pretty
bleak, doesn't it? But per legal eagles, Nolo Press: "There
is much you can do to take control of your own loan situation
if you have the right information, a little perseverance and
a large amount of patience.... Ignoring your loans will not
make them go away. Eventually, you will have to deal with
them. Further delay just increases the amount you owe, as
interest and fees and costs for collection mount up."
This
article hopes to cover the basics for you as well as what
options you've got when it comes to your student loans. Whether
it's repayment issues, consolidation, rehab or postponement,
this page covers it all in an effort to help you understand
your student loan repayment options and rights. If its a student
loan you're looking for, be sure to check out SimpleTuition
for flexible student loans and refinance options.
To understand student loan repayment,
it is first necessary to understand student loans overall.
One of the best resources I have found to accomplish this
task is eStudentLoan's site Financial Aid 101 which is a basic
review from start to finish including a calendar of tasks
need to be accomplished for loan acquisition. Additionally
I have found the following breakdown to be very helpful in
determining what is available.
Besides "work-study
programs", there are grants and loans. Grants do not
have to be paid back, loans do. Federal loans can be "subsidized",
which means the government pays for the interest while you
are in school. Otherwise, the loan is "unsubsidized",
meaning you pay the interest yourself. Subsidized loans are
generally given to students with "greater demonstrated
need". All federally guaranteed student loans fall under
three main categories: Ford Direct Lending Program (FDLP),
Campus Loans, and Federal Family Education Loan Program (FFELP).
FDLP- These are
loans directly from the federal government and paid back to
the federal government.
Campus Loans- A
small amount of federal funding is given annually to institutions
which can be loaned out to students, paid back to the institution,
and re-loaned to other needy students. They are often called
Perkins Loans or National Direct/Defense Student Loans
FFELP- Department
of Education issues through your school a list containing
an approved network of commercial lenders who provide loans
to students. These loans are most often labeled direct loans,
Stafford Loans, Guaranteed Student Loan (GSL), Federal Insured
Student Loan (FISL), Plus Loan (for parents only), SLS Loan,
and consolidation loan.
There are also
multiple potential repayment schedules. Therefore, if you
find yourself unable to deal with your current repayment plan,
do not assume you are locked into that plan. Four of the most
common options are:
Standard- fixed repayment above $50 for
3-10 years.
Graduated- repayment begins low and increases over the years.
Extended- repayment from 12-30 years depending on the amount.
Income Contingent- each year's repayment amount is based upon
your income from the previous year.
DEFAULT
Your loan is considered in default when there has been no
payment nor attempt to arrange for payment for 180 days. To
get out of default, the student must request a "reasonable"
repayment schedule from the lender. The lender will consider
the request based upon information supplied by the student
and if the request is approved, the lender will suggest a
new amount. There is no amount set
by the term "reasonable" but if accepted by the
student, the new plan must not reach default a second time.
Accordingly, if the amount is not acceptable, re-contact the
lender before agreeing to the schedule. WARNING! You do not
get a second chance to get your loan out of default. Therefore,
agreeing to the terms is essential. Also be aware that though
repayment amounts are rarely set below $50, theoretically
a "reasonable" amount could be as low as $5.
When you have completed
six on time payments, you can apply for a new federal loan.
However, to be completely out of default, you
must make 12 consecutive on time payments. But once your
loan is out of default, you have other options available to
you such as deferment, forbearance, consolidation, and even
cancellation.
Special Note: Perkins Loan borrowers who
are in default have recently been offered another option called
"Rehabilitation".
A borrower can make arrangements to make 12 "on time"
monthly payments after which his/her loan default record is
removed from credit bureau files and he/she is back in repayment
status. Rehabilitation can be attempted any number of times
(if the borrower does not meet the 12 on time payments) but
it can only be accomplished once. If borrower goes into default
again after completing Rehab, there is no second chance. This
is only available on Perkins loans in default.
DEFERMENT & FORBEARANCE
If your loan is not in default and you are having difficulty
making ends meet, you may be eligible to postpone payment.
A forbearance is an approved general delay from making payments
for a set period of time but not for any particular reason.
Forbearance is generally requested only when deferment is
not or cannot be used. With a forbearance, interest continues
to accrue. A deferment is similar but does not accrue any
interest. But the major difference between the two is that
a deferment includes a very specific reason for the delay.
The most commonly
approved reasons for deferment include:
Economic Hardship,
Unemployment
In-School at least Half-time, Graduate Fellowship Program,
Rehabilitation Training
Parental Leave, Working Mother
Public Service Deferment for Armed Forces, Action Program,
Tax Exempt Volunteer Program, Public Health Service Program,
Peace Corps, NOAA
Education Related Deferment for Intern ship/Residency Program,
Teacher Shortage Area, PLUS Loan student In-School, Fellowship,
or Rehabilitation
Temporary Total Disability Deferment Request
CANCELING
Obviously, there must be extended circumstances to have a
loan cancellation approved. However, cancellation over deferment
or forbearance sometimes is needed and is not unusual. Qualification
is done via application from your lender or through the Department
of Education's Debt Collection Services Office (phone: 800-621-3115).
Be certain to return all needed support documentation.
Reasons for cancellation
are more intense though somewhat similar to reasons for deferment:
Total disability
Death of the member
Member of armed services
Certain full time teachers, nurse, medical tech, law enforcement,
correction officer
Certain professions working with disabled, or low-income high-risk
children and their families
Certain staff and volunteers for Head Start VISTA, or Peace
Corpse
CONSOLIDATION
"Transferring credit balances to the wrong lower interest
loan is tantamount to accepting a life preserver from a shark.
Similarly, choosing the wrong consolidation loan savagely
threatens the point of consolidating at all." The article,
however, goes on to say that if you know what you are doing,
consolidating can offer one more option that can lower your
payment by combining loans. Most consolidation lenders, however,
will not consolidate less than $7500 total in student loans.
The repayment period of most of these loans is usually 12-30
years and can be a fixed monthly payment or graduated over
time. Obviously the longer the extended repayment period,
the more costly the loan. The obvious solution to consolidation
loan is to accelerate the payoff as soon as possible and not
drag out the loan for the full period. As can be seen in the
reference article, the interest saved can often be in the
thousands of dollars. --From
the About.com Guide
