Methods for Adjusting your Student Loans
In the past few years, the rates of default on student loans have continued to tick upward, as many current or former students have entered the job market and found themselves unable to make their monthly payments.
Many loan holders understand the risks of defaulting, but feel unable to do anything about their problems due to their financial situations. The good news is lenders, private and public, are now offering many options that a student can use to stave off default. Most options fall into a few broad categories: consolidation, deferment, forbearance, forgiveness, cancellation, and discharge.
Loan consolidation centralizes all of your qualifying student loans to one monthly payment. Consolidation allows you up to 30 years to repay your loan(s), to switch to a different repayment plan, and even to change your interest rate from variable to fixed. You can consolidate your loans once you have graduated, left school, or are enrolled below half-time, although at least one of your Direct or Federal Family Education Loan (FFEL) program loans must be in a grace period —a set period of time before you begin repaying your loan, depending upon the type of loan you have: Direct and Stafford loans typically have a six-month grace period— or in repayment. Please note: You cannot consolidate a private education loan, and you must meet certain requirements if your loan is currently in default.
If you have already consolidated your loans, you usually cannot do so again unless: 1) you are adding another qualifying loan to the consolidation; 2) if your loan is in default status or default aversion; 3) OR if you plan to apply for loan forgiveness via the Public Service Loan Forgiveness Program. A list of all federal student loans that can be consolidated is available at the Direct Loan Consolidation Center: Call 1-800-557-7392 or visit them online at www.loanconsolidation.ed.gov.
Loan deferment is a temporary period when you can delay repayment of your loan principal. During deferment, if you have a Federal Perkins loan, Direct Subsidized loan, and/or a Subsidized Federal Stafford loan, you can delay or reduce your loan payments, and the government may pay the interest on your loan. This is a temporary option that you may apply for if you are:
- Enrolled in college or a career school at least half-time
- Studying in an approved graduate fellowship
- Taking part in approved rehabilitation training for the disabled
- Unemployed or underemployed
- In the midst of economic hardship (this could include serving in the Peace Corps)
- In the midst of service that qualifies for Perkins Loan discharge or cancellation — check with your school for more information about what this would be
- Serving the military as active-duty personnel during a war, military operation, or national emergency
- Fewer than13 months removed from the aforementioned types of active-duty military service (in some situations)
These options depend upon your loan type. To learn more, contact your loan servicer, or visit the Federal Student Aid Web site at http://www.studentaid.ed.gov/repay-loans/deferment-forbearance .
Loan forbearance allows you to stop making payments or reduce your loan payment for up to a year. Interest continues to accrue, though, and you can either choose to pay the interest during forbearance, or allow it to accrue so that it may be added to your principal balance and increase your payment amount in the future. Loan forbearance is an option to consider if you do not qualify for a deferment. Forbearances can either be “discretionary” or “mandatory.” Discretionary forbearances can be granted by your loan servicer if you are in a time of financial hardship or illness. If you meet the forbearance eligibility criteria, your lender must grant you a mandatory forbearance. These criteria include:
- You meet specific requirements while in a medical or dental internship or residency program
- Your entire monthly student-loan payment is more than 20-percent of your total monthly gross income (pending conditions — talk to your loan servicer for more information on this)
- You are in the midst of serving in a national-service position (such as AmeriCorps) for which you have received a national-service award
- You perform teaching service that qualifies for teacher-loan forgiveness (see http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/teacher for more information on this)
- You qualify for partial loan repayment under the U.S. Department of Defense Student Loan Repayment Program
- You have been activated by a governor for National Guard service
Request a forbearance by applying to your loan servicer; be prepared to provide documentation if they ask for it. You must also continue to make payments on your loan until your request for forbearance has been approved.
Loan forgiveness, loan cancellation, and loan discharge mean that you do not have to repay the rest of your loan. This can happen if you meet specific requirements that suit your particular type of student loan. You may be eligible for these options if you:
- Become permanently and totally disabled, as certified by your doctor, or die. In the event of your death, your relatives or another representative must provide an original or certified copy of the death certificate.
- Have your loan discharged in bankruptcy (which is not automatic, and necessitates that the court conduct a three-part test to determine your eligibility)
- Are attending a school that permanently closes while you’re attending, thereby preventing you from completing your program, or if your school closes within 90 days after you withdraw. Contact your loan servicer for more information.
- Were falsely certified to receive student loans, either by your school, or due to identity theft
- Withdrew from school, but your school didn’t pay the refund owed to the U.S. Department of Education (this would discharge only the amount of the unpaid refund)
- Are a teacher, pending certain requirements, such as being a new borrower and a full-time teacher in a low-income elementary or secondary school or educational service agency for five consecutive years. For more information, visit www.studentaid.ed.gov/tc
- Are employed in a certain type of public-service job and have made 120 Direct Loan payments: visit www.studentaid.ed.gov and choose “Public Service Loan Forgiveness” for more information
- Perform certain types of public service —including nursing, law-enforcement, early intervention for the disabled, special-ed teaching, teaching of low-income students— and have a Federal Perkins Loan. Contact your school for more information.
If you think you might qualify for loan forgiveness, cancellation, or discharge, contact your loan servicer (or the school that made your Federal Perkins Loan) and complete the requisite application process. You are required to continue making payments while your case is being processed —though you may be granted forbearance or deferment during this period; ask your loan servicer or the school that made your loan about this option.
If your loan discharge, forgiveness, or cancellation is approved, you might even receive a refund for some or all of your loan payments from the U.S. Department of Education. If your loan was in default at the time of discharge, the discharge may erase the default status, and any negative effect of your student-loan status on your credit score will be erased.
If your request for loan discharge, forgiveness, or cancellation is denied, that decision is final and cannot be appealed (except for cases involving false certification and/or signature forgery). Talk with your loan servicer about other repayment options.
For more information about loan cancellation, discharge, or forgiveness, visit http://www.studentaid.ed.gov/repay-loans/forgiveness-cancellation .
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