In early 2013, the Consumer Financial Protection Bureau estimated that student loans guaranteed or held by the federal government have exceeded $1 trillion. With a 20 percent growth in student loan debt from the end of 2011 to May 2013, student loans are second only to home mortgages in terms of big-money consumer debt.
If you find you cannot repay your student loans, you are not alone. Limited post-grad employment opportunities have caused one in ten recent borrowers to default on their federal student loans within the first 24 months of repayment — the highest rate since 1995, according to a September 2013 announcement from the Department of Education.
Why should you avoid defaulting on your student loans? First, your credit rating is damaged, crippling your ability to borrow money. Additionally, late fees will continue to accumulate on top of your existing debt, and loan holders can garnish your wages or take portions of your tax refund. To avoid defaulting, it is crucial that you speak with your lender first to see what options are available specific to your situation and type of loan.
Deferment: Many individuals defer their student loans for a period of time for reasons such as going back to school at least half-time, economic hardship and being unemployed. In addition to stopping payments for a set period, some deferments also stop interest from accruing on your balance during that period. Other conditions like being on active duty or called for military service while in school or joining the Peace Corps may qualify you for deferment — so long as you aren’t more than 270 days behind on your payments (or six months behind for an unemployment deferment on a Federal Family Education Loan).
Forbearance: Other individuals apply for forbearance. Health problems, inability to pay within the maximum repayment term (usually 10 years), or monthly student loan payments that exceed 20 percent of your monthly income may qualify you either to postpone or reduce your payments for a specific period. Interest will continue to accrue in this scenario.
Loan consolidation and income-based repayment schedules: These two strategies allow you to continue to pay down your student loans, but with more manageable monthly payments based on your current income and circumstances.
Cancellation of loan debt: In some extreme situations you may partially or completely cancel your student loans. These situations include:
Your school closes while you are attending;
You enter qualifying public service or teaching programs;
You become disabled.
In cases such as these, the government may cancel your student loans, and you may also qualify for assistance in repairing your damaged credit.
When it comes to struggling with student loan debt, make sure that you examine your budget closely to determine exactly where your money is going. Even short-term sacrifices could make a tremendous improvement over your long-term financial health. Research all of your options and make every effort to protect your credit and your future purchasing power.
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