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On the Money

Can’t afford your student loan payment? Maybe you should push pause

By Candice Choi
Associated Press / October 21, 2009

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You have a $120,000 college degree and no job. That won’t stop your student loan bills from arriving. The grace period on student loans for the class of 2009 is about to expire. One option for anyone in a bind is deferment or forbearance, which allow for the postponement of payment under select circumstances. Here’s what you need to know.

Eligibility: Most people know federal loans can be deferred if you enter graduate school or the military. But you can also get a deferment for unemployment or economic hardship. To qualify for the latter, you can’t earn more than $16,245 a year. You’re eligible if you get public assistance or volunteer with the Peace Corps.

If you don’t qualify for a deferment, you might be able to postpone payments if you’re dealing with health issues or other circumstances. The government calls this a forbearance. Patricia Christel, a Sallie Mae spokeswoman, said the company is trying harder to work out payment arrangements rather than immediately using forbearance.

Economic hardship deferments are granted one year, while unemployment deferments are granted in six-month increments. You can reapply as needed for a total of three years each. Expect less leniency with forbearance on private loans.

Drawbacks: These measures should be used as a last resort, since interest continues accruing. One way to minimize the impact is to pay the interest costs while your loan is in deferment or forbearance. Otherwise, it will be added to the loan amount.

The exception is if you have a subsidized loan, which is when the government covers the interest while you’re in school. The government will also pick up interest during a deferment.

Other options: A relatively new option for federal loans is the Income-Based Repayment program. The program caps monthly payments at 15 percent of your earnings above a certain threshold, currently around $16,000. Those who earn less than that may not have to make monthly payments. Any debt remaining after 25 years is forgiven. You can also change payment plans with private loans. Or your lender may be willing to rework the terms of your loan.

Ignoring bills: The benefit of getting a deferment or forbearance is that your loan remains in good standing, and there is no impact on your credit report.

Otherwise, federal loans usually go into default if you don’t make payments for nine months. Sallie Mae says its private loans typically go into default after seven months. In default the entire balance of your loan becomes due. Your loan might be turned over to a collection agency, and you’ll be liable for the costs of collection. Your wages could also be garnished, and your tax refunds could be intercepted.

Student loans typically aren’t discharged with a bankruptcy. And once in default, you can’t get a deferment or forbearance. So don’t let it reach that point.

Candice Choi writes for the Associated Press.

10 tuition tips

10 tuition tips

Worried about being able to afford college? Check these tips.