To begin, keep in mind these basic tips for dealing with your debt:
Know Your Loans
You can't manage your student loan debt unless you understand what you owe and how to pay. Make sure you know the balance on each of your loans, when payments are due, and where to send them. (If your lender offers an electronic payment option, sign up for it if you can. Your payments will never be late, and you may also qualify for a reduced interest rate.)
President Obama’s Pay As You Earn program has been in the news a lot. It’s an effective way for many student loan borrowers to lower their monthly payments -- but it’s not the only way. There are many options for relief from student loan debt, depending on what kind of loans you have, when you took them out, and what your financial situation looks like now.
Before you start exploring ways to shrink your monthly obligations, know that you should consider reducing or postponing your student loan payments only if the standard repayment plan (10 years for most loans) is truly out of your financial reach. more...
If you have more student loan debt than you can comfortably handle, there may come a time when you're tempted to throw up your hands and stop making payments. Not so fast. The consequences of student loan default are harsh -- see What Happens If I Default on My Student Loans -- and defaulting will dramatically increase your debt headaches.
Here are some suggestions to help you stay out of default.
Getting Organized: Strategies for Managing Student Loan Payments
Sometimes people who have enough income to pay off their loans end up in default because of poorly organized records. You can take some simple steps to get your paperwork together and reduce the chances that a loan will fall through the cracks.
Consolidating your student loans may make it easier for you to live with them. At best, it could reduce your monthly loan payments, cut your interest rate, and ease the burdens of recordkeeping. At worst, it won't help with any of these concerns -- and it could cost you important benefits associated with your federal student loans.
If you're considering student loan consolidation, it's essential that you know the terms of your existing loans and understand how consolidation works before you proceed.
What Is Student Loan Consolidation?
Loan consolidation is a process that lets you replace multiple student loans with a new loan from a single lender. The interest rate on the consolidation loan will be based on the average interest rates of all the loans that you consolidate.
EXAMPLE: If you consolidate a $5,000 loan at 6.8% interest and a $10,000 loan at 6.0% interest, your new interest rate will be $6.375%. (To figure out the consolidation interest rate for your loans, you can use the FinAid Loan Consolidation Calculator.)
Most federal student loans default when the borrower fails to make payments for 270 days (nine months). Private loans may have different terms; they may default if you miss just one payment. Read your loan contracts carefully to be sure you understand when you're at risk for defaulting -- then do all you can to avoid it.
The following lists should convince you that defaulting on your student loans can lead to overwhelmingly negative consequences.
Student Loan Default: Consequences and Penalties
If your student loans go into default, here are some of the difficulties you may face:
If your student loans are canceled, you don’t have to repay them. To qualify for loan cancellation (also called "discharge"), you must meet very specific requirements that depend on the type of student loans you have and when you got them.
Student loan forgiveness programs can bring great relief to borrowers who qualify, but they aren't a magic bullet. Usually, you must work hard for them, serving your community and making regular payments for years before your loans are erased. Folks who benefit from forgiveness programs usually work for low pay in jobs that help others -- for example, teachers, public defenders, or health care professionals working with populations in need.
Federal Public Service Loan Forgiveness Program
The best known and most widely used student loan forgiveness program is the federal government's public service program. The goal of the program is to encourage graduates to work full-time in public service jobs.
Under the program, the government will forgive a borrower's Direct Federal Loans after they have made 120 regular payments -- that's ten years' worth -- while working full time for a federal, state, or local government agency or for a nonprofit organization.
If you think you need a lawyer to help with your student loan troubles, slow down. Most repayment problems can be solved without a lawyer. A lawyer may tell you they can teach you about repayment options, help you lower or postpone your payments, reduce your interest rates, or get your loans forgiven. But consumer-friendly, no-cost resources exist to help you with all of these tasks and more.
Disputes with a loan servicer. If you run into difficulties with a loan servicer, you may be able to get help without calling a lawyer. Many free student loan ombudsman programs are available to help you resolve conflicts. For details, see How to Get Help With Student Loan Problems.
Getting rid of student loans in bankruptcy is difficult -- but it’s not always impossible. To succeed, you must convince the court that repaying your student loans would cause you "undue hardship."
Bankruptcy: A Brief Overview
You probably already know that bankruptcy is a court procedure you can use to get your debts erased or reduced. But you may not know there are two different kinds of bankruptcy proceedings.
Liquidation (Chapter 7) bankruptcy. Chapter 7 is the most common type of bankruptcy. When you file for Chapter 7, you may have to surrender some of your property to pay creditors, but the end result is that most of your debt will be completely wiped out. But student loans are a big exception to this rule; you must file additional paperwork and meet a high standard to discharge your student loans in a Chapter 7 case.