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Explore options before defaulting on student loans

Federal student loan default rates are on the rise, but there's no need even in this weak economy for you to fall into arrears.

That's because when it comes to repaying an education loan, no one - except maybe Mom or Dad - is more lenient than Uncle Sam.

Can't find a job? Or the one you have barely pays the bills? Maybe you have decided to go back to school to wait out the recession.

Whatever the situation, the government has options to provide relief - sometimes for years - from federal loan payments while you get your finances in order. You might even have your loans forgiven over time.

"If students are conscientious about it and they explore their options, there shouldn't be any reason they would be in default, even if they don't have a job," says Mark Lindenmeyer, financial aid director at Loyola University Maryland.

You run into trouble, though, if you blow off repaying the taxpayers who put you through school. The government comes down hard.

It might garnishee your wages, apply future tax refunds to the debt, prevent you from renewing a professional license, hit you with interest, late fees and collection costs, and even ding your Social Security retirement benefits.

The latest figures show the default rate rose to 6.7 percent for the two-year period that ended October 2008, up from 5.2 percent a year earlier.

At the first inkling that you might have trouble repaying your loan, contact your lender or loan servicer. For private loans, your options will depend on the lender. But here are some moves with federal loans:

DEFERRAL: Loan payments can be suspended while you return to school half-time or more. You also can defer payments for up to three years if you can't find a job or have some other economic hardship, such as being on public assistance or joining the Peace Corps.

FORBEARANCE: Don't qualify for a deferral? Your lender or loan servicer may approve a forbearance, where payments are suspended or temporarily reduced while you gain your financial footing. A forbearance is granted for up to a year at a time but for no more than three years. Interest will continue to accrue.

REPAYMENT PLANS: The standard repayment is a fixed monthly sum for 10 years. If that's a struggle, consider one of several other payment plans. Keep in mind that with these others, you'll pay more interest over the life of the loan.

CONSOLIDATION: You might also be able to lower your monthly payment by consolidating your student loans into one new loan and extending the repayment period. The higher the debt, the more time you get to repay. You can take up to 30 years if you're shouldering $60,000 or more in loans.

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