The following is a guest post by Paul Smith. He is an attorney with an interest in personal finance. He blogs at insideconsumerfinance.blogspot.com.
Are your student loans out of control? If so, you have a number of options to assist you in getting your student loans back under control. Some involve taking advantage of some repayment options that many people are not aware of, while others involve temporarily suspending your obligation to make payments to allow you to get your personal financial circumstances under control. Finally, simply communicating your situation, particularly if you are having financial difficulties, to your loan servicer will also often go further than you think.
Are You Taking Advantage of all Available Repayment Options?
The first and most important question to ask if your student loans are out of control is whether you are taking advantage of all of your potential repayment options. All federal student loans offer a variety of repayment plan offers, including what are called income based or income contingent repayment. Income based repayment (IBR) is a program in which your required payments are pegged to your income; payments cannot constitute more than 15% of your discretionary income based upon the amount you owe, your monthly income and your family size. (The rate is 10% for those who first borrowed after July 1, 2014). The one drawback to IBR is that your payment is readjusted every year based upon your income as reported on your previous year’s taxes. Income contingent repayment plans are also based upon your total student loan debt, family size and income. With income contingent repayment plans, the maximum payment is 20% of your discretionary income or the amount you would pay over a 12 year loan term, whichever is lower.
Contact your loan servicer for further information and they will provide you with the necessary forms to apply for these three repayment programs.
Forbearance or Deferment May Be Appropriate for You
Most federal student loans also offer options for either forbearance or deferment. Forbearance means that your obligation to make payments is suspended for a certain period of time. One caveat to forbearance, however: interest does accumulate during any period during which you are on forbearance and most loans, including federal student loans, provide that all accumulated interest will be capitalized (i.e. added into principal) at the time that you are taken out of forbearance and put back on a payment plan. Forbearance is not automatic, but lenders are often happy to work with you in order to keep your loans current. Deferment is similar to forbearance but is available for specific enumerated circumstances, such as if you are experiencing financial hardship or are unemployed/unable to find employment, whereas forbearance is at the discretion of the lender and can be for any reason. Interest is also capitalized at the end of a deferment period. Deferment can extend no more than 3 years, while forbearance cannot extend more than 12 months at any time.
If your student loans are private, your options are more limited. Very few private student loans offer the type of flexible repayment options such as IBR or ICR that are available to those with federal student loans. In addition, not all private student loans offer forbearance or deferment for borrowers either. To the extent that forbearance is available under your private student loan, there may be fees or penalties associated with having your loans placed in forbearance status.
Private Loan Borrowers Have Much Fewer Options, Unfortunately
If you do have private loans, your best bet is to contact your servicer to explain your situation. Servicers are often extremely willing to work with you because, even if you cannot make your required payment, something is better than nothing from their perspective. It costs them money to place you into collections and they will generally do everything they can to avoid having to do that. And if they decide to sell your debt completely to a debt collector, it will be for less than the face value of the debt, so it is in their interest to keep you from defaulting on your student loans.
To the extent your payments are completely unaffordable, you may also consider whether refinancing might make sense. Both federal student loans and private student loans can be consolidated, although private student loans cannot be consolidated into any federal consolidation loan.
Finally, failing all the above, it is always worth a telephone call to your servicer to explain your situation and see if they will work with you.
Need Further Information?
If you need more information, there are some wonderful organizations out there which assist borrowers who are having difficulty with loans or whose loans are in default. Student Loan Borrower Assistance at www.studentloanborrowerassistance.org, which is a resource offered by public interest law firm the National Consumer Law Center, and American Student Assistance www.asa.org, a non-profit organization which provides information on managing your student loans, including all of your available options in the event you run into trouble with your loans.
How about you all? Are your student loans out of control? How have you been able to get a handle on them?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/jakerust/16608691510/
