You may have been rolling right along, keeping your finances in good order, then financial catastrophe strikes. Suddenly you are having trouble meeting your student loan payments. Not an uncommon circumstance in these recessionary times. Take a breath. Nearly all student loan lenders offer ways to help you through your temporary cash-flow setback.
Strategies to Avoid Defaulting on Your Student Loan
If you are under financial duress and having difficulty with your student loan payments, the most common strategy is to approach the lender and request a deferment or a forbearance. Each has its advantages and each has its drawbacks. You need to know the difference before you settle on which route to take. The most important consideration is to realize when your debt has become overwhelming and immediately taking steps to prevent defaulting.
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Deferments and Forbearances
So, how do you go about getting a deferment or forbearance. They are two different creatures. A deferment occurs when a lender allows a short-term hiatus in student loan payments. This reprieve is granted under a number of circumstances that inhibit your ability to pay. Reasons may include unemployment, temporary disability, a return to school at least half-time, or if you undertaken certain kinds of community service. Depending on the type of loan, the government may pay the interest during the deferment time frame.
Forbearances can occur at the discretion of the lender. The lender will grant you permission to reduce or stop your student loan payments for a given time frame. Be aware that interest will continue to accrue. Forbearances are harder to obtain than deferments. If you are already in default on your loan, a deferment is never granted. Being in default will not prevent you from seeking a forbearance.
Application for a deferment or forbearance must be made directly to your lender. It is not something that is done automatically when your payments start to slip. You will also have to prove you have a valid reason for making the request. Both forbearances and deferments usually allow a non-payment time frame of about six months.
Cancellations
Requesting a cancellation of your student loan is a far more drastic measure. Cancellation may be granted depending on the type of loan and your reasons for the request. Among these are death or permanent disability. Taking some jobs that are deemed in the community service, such as teaching or nursing in certain disadvantaged geographical areas, could qualify your loan for cancellation.
Rocky Road to Repayment
If you do not qualify for deferment, forbearance, or cancellation, you could be faced with unpleasant circumstances. When you first miss a couple of payments, your account is considered delinquent. After six months of nonpayment your student loan account is declared to be in default and the matter becomes serious. Every effort should be made to forestall default. Borrowing from friends or family, or seeking other financial aid such as a loan consolidation, may be necessary to avoid this calamity.
At this point you and your account will be passed to a collection agency and this will incur more administrative fees, more late payment fees, and, of course, interest will continue to accrue. The Internal Revenue Service (IRS) is authorized to intercept any income tax refunds that may be due you. Depending on the type of loan, under current law the Department of Education is authorized to garner up to 15% of your wages if you are in default. And they do not have to sue first to do it.
Consequences of Student Loan Default
One way or another, you are going to have to pay back the loan unless you can get it canceled or forgiven. Certainly you do not want the stigma of default on your credit history. Whatever you, do not ignore the situation and hope for a happy ending.
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