Suppose that you have been paying your student loan payments as promised for several years and then your circumstances get very uncomfortable because of additional expenses or loss of income. What can you do to keep a bad situation from becoming worse? Many former students or graduates find that they are pinched by problems beyond their control and cannot pay back all of their loan payments. Nearly all lenders offer certain options to help you through temporary cash flow bottlenecks.
The most common strategy to temporarily postpone the repayment of your student loan is to request either a deferment or a forbearance from your lender. There are several alternatives that can be considered and each one has advantages and disadvantages that you need to know before committing to that course. Do not act like you are in denial because some of the options will take time to implement and you will make your situation worse by waiting. The biggest mistake that you can make in this situation is to ignore the growing risk and your lack of payments will put you into default.
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How do you obtain a deferment or forbearance of your loan? These are not the same choice. A deferment occurs when your lender grants you a temporary reprieve from paying your student loan based on a specific condition that prevents you from repaying the loan. This may include problems or opportunities like unemployment, temporary disability, some kinds of community service or a return to school on at least a half-time basis. The government often pays the interest during deferment periods.
However, a forbearance occurs when your lender, at its discretion, grants you permission to reduce or stop your loan payments for a set period of time. Interest will continue to accrue. It is usually easier to obtain than a deferment but you still have to follow the rules in asking. The forbearance may be allowed when you are already in default but a deferment is never granted when already in default.
To obtain either one of these temporary solutions, you will need to apply with your lender. It is not automatic and you will have to prove that you have a valid reason to qualify. The period you may be granted is usually six months or so.
A much more drastic measure to consider is the cancellation of your loan. This may be granted based on the type of loan that you have in force and your qualifications. Some examples of a cancellation consideration are the death or permanent disability of the borrower or if the borrower takes a job teaching needy students in certain geographical areas.
If you don't qualify for a deferment or cancellation of the loan, then here is what happens next. The first step when you haven't made a payment is delinquency, which means that you have missed one or two months payments. After six months, your account is in default, which is a serious matter. You should make every effort to avoid being in default. You will be subject to the efforts of a collection agency and additional fees will probably be added to your past due balance. The IRS is authorized to intercept your income tax refund, if you do not respond to repeated collection efforts. Under current law, the Department of Education is authorized to garnish up to 15% of your wages if you are in default without having to sue you first.
I recommend that you avoid the problems associated with the default process even though there are some means that may help you eventually emerge from the loan collection efforts. It will be easier to begin earlier to establish other options like deferment than just ignoring the notices and hoping for a surprise happy ending.
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