When you’re in over your head in student loans

Free College Pathology Student Sleeping Creative CommonsAre you (or is someone you know) in trouble with student loans? A difficult job market colliding with a mountain of student debt means you’re not alone.

My loan payments will be starting soon, but I can’t afford them. What should I do?

First thing to do is make a list of all of your loans — the lender, interest rate, balance due, monthly payment and whether it’s a private loan or a federal loan. If you don’t remember, you can search for a list of your federal loans at the National Student Loan Data System (click Financial Aid Review). You can also check your credit report (free at annualcreditreport.com) to look for other lenders if you have private loans, too. Once you’ve identified all of your loans, you can evaluate your options.

With a federal loan you may find relief through various programs like the income-based repayment plan, the income contingent payment plan, or even deferment or forbearance if your financial circumstances are dire. Visit studentaid.ed.gov for information about the programs and contact your loan servicer to discuss your options.

Remember that if you are granted forbearance or deferment, it is not forever, and you will need to reapply after six to 12 months. By talking with your federal loan servicer, you are likely to find a plan that will work for you.

Private student loans are a different story. They are not required to offer alternative payment options, but may offer some relief, although not as helpful as the federal repayment programs.

Lesson here to new students: Handle private loans with care. Know what you are getting into, and take full advantage of federal loans available first.

Both federal and private loans may be forgiven with the death or disability of the student.

I’ve already missed a payment or two.

If your loan is not yet in default, contact your lender before it goes too far and your credit is damaged. Late fees and additional interest can add Casio COLLEGE FX-100 Pocket Calculatorup quickly and balloon your balance due. Don’t ignore the problem.

While it takes about 270 days for a federal loan to go into default, a private loan may only take 120 days. Once you are in default, managing your loans becomes much harder.

I have no idea how much I owe; I’m afraid to open my mail. All I know is it’s more than I can pay, and now I’m in trouble.

If it’s been a while since you’ve made a payment (or never), and the bill collectors are calling, it’s likely you are in default. Breaking through the denial and facing the problem is paramount. Ignoring it won’t make it go away; it will only get worse.

Have a trusted friend or family member help you open your mail and sort it out, and making the list of your loans we talked about earlier. It’s likely to be painful, but it’s necessary.

If you are in default and ignore it, your loans will go into collections and will be due in full immediately. For your outstanding federal loans, prepare to have any income tax refunds taken to apply toward your balance, and your wages may be garnished.

However, with federal loans, by contacting your lender, you can get out of default and back on track by working out payment arrangements. You may be able to consolidate your loans and enroll in a new payment plan (including the income based plans), or you may wish to rehabilitate your loan. Rehabilitation allows you to clear the default from your credit report by making nine on-time payments.

Private loans, again, are a different story. While a private lender cannot seize your tax refund or garnish your wages, it is also not required to offer you any sort of modification or payment plan. However you may be able to negotiate a plan on your own, or offer to pay your loan in full for less than you owe.

When talking with your lender, be sure to keep good notes of who you spoke with and what they said. Document everything and know your rights under the Fair Debt Collection Practices Act, which basically protects you from being harassed by creditors.

Can I just declare bankruptcy and wipe out my loans?

Unfortunately student loans are quite difficult to discharge in bankruptcy. There is one possible exception: If your attorney can prove undue hardship in a separate adversary trial within your bankruptcy proceedings, all or part of your federal loans may be discharged. This is possible, but not easy and not common. Private loans are also generally not dischargeable, but an attorney should confirm this for you. It may be worth asking.

There are a few ways to get out of your loans, one being the public service loan forgiveness program, in which you can have your outstanding federal balance forgiven after 10 years of qualifying full-time employment (and on-time payments) in the public or nonprofit sectors.

There are also creative solutions out there: Communities like Niagara Falls and some areas of Kansas are offering loan forgiveness for making their town your new home.

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