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10 steps to take if you can't pay your student loan bills

October 19, 2010

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Are you a recent college grad staring down the barrel of an overwhelming student loan repayment, or even years out of school and still struggling to pay your monthly loan obligation? While putting off payments and hiding from bill collectors may seem like the only immediate solution, falling behind on your student loans can have serious financial impact. The good news is that there are several payment options to help struggling borrowers make their financial situation and repayment more manageable.

Boston-based nonprofit American Student Assistance offers these 10 things you should know about your student loan payments if you're unemployed - or barely getting by.

1. Unemployed? Postpone payment with a deferment

Unemployment, extreme economic hardship, enrolling in school at least half-time, or active military duty may qualify you to temporarily postpone payment on federal student loans with a deferment. If your loans are not subsidized, you may be responsible for the interest that accrues during the deferment, increasing the total amount you owe.

There are many different types of deferments and each one has terms and conditions. To qualify for the unemployment deferments, you be must be working 30 hours a week or less and actively seeking full-time employment. You must renew this deferment every six months and can receive it for a lifetime maximum of 36 months. If you do not qualify for the unemployment deferment, talk to the company that collects your student loan payment or check out asa.org for a complete list of other deferment types and their requirements.

2. Know what you owe

"I owe how much?" The first step in getting your student loans under control is knowing how much you owe, what the monthly payments are, and where to send them. You should always hang on to all your loan paperwork, but if you didn't, your college financial aid office should have provided you with a complete breakdown during your student loan "exit interview." If you didn't hang on to your exit interview folder, visit the National Student Loan Data System for a complete list of all your federal student loans. Your private student loans can be located by requesting a copy of your credit report.

3. Know what you're working with

The two major types of student loans are federal (government-backed Federal Family Education Loans, Direct Loans, or Perkins Loans) and private (non-government-backed, issued from a private lender). Federal student loans usually have fixed interest rates and offer flexible repayment plans. Private student loans often carry variable rates and less flexible payment options.

If your loans are federal, there are a variety of options to help you lower or postpone your monthly payment. If your loans are private, though, all is not lost - contact your lender immediately and let them know you can't make the monthly payment.

4. Extend your payments

If you took out your oldest federal student loan on or after October 7, 1998, and you have at least $30,000 in loans exclusively in the Direct Loan or Federal Family Education Loan Program, you can extend your repayment period from 10 years to as long as 25 years. This lowers your payments, but it increases the total interest you pay over the life of the loan-making your loan more expensive. Consider extending your repayment by only a few years, instead of the maximum time available, to save money in the long run.

5. Choose a graduated repayment plan

If you don't make a lot of money currently, but think you will in the future, you can lower your federal student loan payments for a while – without extending your repayment period – with graduated repayment. Graduated repayment lets you pay just the interest on your loan for two-to-four years. Payments then increase gradually so the loan is repaid in the standard 10 years. When choosing this schedule, make sure to plan for those larger payments. Graduated repayment can increase the total amount of interest you pay.

6. Base your payment on your income

If you have high student loan debt but low income, there are three different repayment plans that may help: income-contingent for Direct Loans, income-sensitive for Federal Family Education Loans, and income-based for either DL or FFEL. While the details of each plan vary slightly, basically your monthly payment is based on some percentage of your discretionary income and/or family size.

In general, you must display partial financial hardship to qualify and your repayment amount could change annually based on your financial situation. You are still responsible for interest that builds up over the length of your payment period. The Income-Based and Income Contingent Repayment options allow any outstanding balances to be forgiven after 25 years of payments.

7. Consolidate your loans

If you are having trouble keeping track of multiple student loan payments, consolidation could help. Consolidation loans combine one or more federal student loans into one new loan. Federal Family Education Loans and Direct Loans can be consolidated together. Standard repayment is set at 10 years but you may be able to extend to a maximum of 30 years. Consolidation loans can't be reversed but can be reconsolidated to add additional eligible education loans. From now until June 30, 2011, you may be eligible to consolidate your loans even if you're still in school - talk to your financial aid office to see if it's right for you. Note that federal and private student loans generally cannot not be consolidated together - and never should be due to loss of federal benefits.

8. Postpone payment with a forbearance

If you don't meet the criteria for a deferment, you may qualify for forbearance. In most cases, forbearance is granted solely at the discretion of the company you make payment to. Forbearances are usually reserved for cases of financial hardship or illness. You will be responsible for all interest that accrues and at the end of the forbearance, the interest is capitalized (added to the principal balance of the loan).

Deferment and forbearance are both preferable to missing loan payments. But, before postponing repayment, see if it makes sense for you to lower your payments with a different repayment schedule. There are limits to how much deferment and forbearance time you can use.

9. Have your debt forgiven

If you work in a profession like teaching or public service, you may be able to have all or part of your federal student loan debt forgiven. There are many different types of Teacher Loan Forgiveness available depending on when you took out your loans, where you teach and what subjects.

Public Service Loan Forgiveness forgives loan balances of eligible, full-time public service employees after they make 120 qualifying payments. Your loan must be in good standing (not defaulted) to be forgiven and only Direct Loans are eligible. If you have Federal Family Education Loans, you can gain eligibility for forgiveness by consolidating your loans into a Direct Loan.

10. Be proactive

If you're having a hard time making your student loan payment, the worst thing you can do is ignore the problem. No one wants to talk about their financial problems, but defaulting on your student loans - or even becoming delinquent - can have some seriously nasty consequences. There are federal programs that can help and often private lenders are willing to work with you on a solution. Contact the company that collects your student loan payment and be frank about your situation. Ask them about all your repayment options to avoid delinquency and default. Raising your hand early will allow them to provide you with the broadest number of options.