Renegotiating Student Loans

Are you falling behind on your student loan payments and worried that the Department of Education will take your tax refund, garnish your wages or sue you? Bankruptcy probably won't eliminate your student loans, due to recent changes in the law. But learning about your options and taking action can defuse the situation before any damage is done to your credit rating or bank account.

Your first concern should be in making sure that your loan isn't in what's called "default," usually defined as not making a payment or attempting to renegotiate payments for the past 180 days. If you're in default, your lender is very unlikely to renegotiate your loan. But you can ask your lender to establish a "reasonable" repayment schedule, based on info you supply such as monthly income, other debts, dependents and so forth. After you've made payments as agreed for six months, you may then be eligible for a new loan.

Deferment of Loans

If you aren't in default, you may be able to get your student loans "deferred," which means repayment will be delayed if you:

• Are permanently or temporarily totally disabled
• Are completely unemployed
• Have a federal loan and can prove that you are suffering an economic hardship (as defined by the lender)
• Are enrolled in school
• Are in the military fulltime
• Are providing medical care in a poor area or to the needy

You'll have to fill out paperwork from your lender and follow through to make sure it's processed correctly. And with some loans, the interest on the loan will continue to build.

Forbearance

If you don't qualify for a deferment, you may be able to postpone your student loan payments during a specific period of time through what's called "forbearance." It's easier to get a forbearance than a deferment, but you'll continue to rack up interest even during the forbearance period.

Canceling Your Loan

You may be able to request that your lender cancel your student loan entirely if you:

• Are permanently or temporarily totally disabled
• Are in the military fulltime
• Are teaching in a poor area or to needy students
• Are providing medical care in a poor area or to the needy
• Are providing certain types of community service, such as serving in the Peace Corps
• Are working in law enforcement, with certain loans
• Withdrew from school or the school closed before you could complete your degree and you did not receive a refund

Renegotiating or Refinancing

If you aren't in default, and don't qualify for deferment, forbearance or cancellation, you may still be able to renegotiate a new repayment plan that's doable in your current financial circumstances. Any time you extend the time for repaying your loan, you'll end up paying more interest. Types of repayment plans include:

• Graduated repayment, with payments that start out lower and increase every few years. If you expect increases in income over time, this makes sense.
• Extended repayment, with a fixed monthly amount that goes longer than the period of your current loan (some as long as 30 years)
• "Income-sensitive repayment," which fluctuates with your income (usually measured annually)

Consolidation

You may be able to consolidate all your student loans together at a renegotiated rate. You'll probably end up paying more interest if your loan period is extended, but it's possible you'll qualify for a lower interest rate to balance it out. Most consolidation lenders won't consolidate student loans that total less than $7,500.

If you go with a consolidation loan, you'll want to make sure you can accelerate payments without a penalty, just in case your financial situation improves over time.

If you're having trouble making your student loan payments, it's most important to act quickly, before you're in default and you've damaged your credit rating. The sooner you educate yourself on your options and take action, the better.

Related Web links:

Student Loan Glossary of Terms

General Consumer Rights Messageboard for more help