college

When you just can't pay

For all your good intentions, life sometimes simply blocks you from making the monthly payments on your student loans. But letting it slide, even a little bit, isn't a smart choice.

With one missed payment, you're considered delinquent. Not only will you be charged late fees to get back on track, but your nonpayment will lower your credit rating, making it harder to finance a home or a car in the future.

Dire Consequences

The consequences are even more dire if you default on your loan, which officially happens after nine months of missed payments. Your loan may be turned over to a collection agency, which will charge you extravagantly for its efforts. You might be taken to court. The government could start deducting loan payments from your paycheck (up to 10 percent of your income can be garnished). You won't be able to receive your income tax refund. And you'll lose your shot at more federal financial aid, including student loans you seek on behalf of your kids. Here's the kicker: After all that, you'll still have to pay back the money.

If you've already defaulted, seek the advice of your lender to get back on track as soon as possible. But if you're struggling to make student loan payments, and adjusting your repayment plan hasn't helped, concentrate on keeping yourself out of default by using these options:

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Deferment

A deferment is available to borrowers for hosts of reasons -- perhaps you're returning to school, going on maternity leave, working as a teacher or a Peace Corps Volunteer or just unable to get a job. With a deferment you get a temporary reprieve from your loan payment, usually for no more than three years. If your federal loans are subsidized, the government will take care of the interest during the deferment; if you have unsubsidized loans, you'll be responsible for the interest that accrues even while you're not making payments.

To see whether you may qualify for a deferment on your federal loan and to download a deferment form, visit the Federal Student Aid Web site, or contact your loan institution about their deferment procedures. Warning: Qualifying for a deferment doesn't mean you automatically get one. You need to formally request a deferment and wait for your application to be processed and approved before you stop mailing your monthly checks. Jumping the gun could land you in default, which makes you ineligible for a deferment.

Forbearance

Forbearance is like Deferment Lite: it's available to borrowers who don't qualify for deferment but who still need a reprieve from loan payments. Here are the differences:

  • When you have a forbearance on your loan, you're still responsible for interest, whether you're loan is subsidized or not.
  • Your forbearance period lasts only a year or less, but it can be renewed for up to three years.

You may qualify for deferment if:

  • you're an AmeriCorps member
  • you're doing an internship or residency
  • your monthly loan payments are greater than 20 percent of your gross monthly income
  • you're otherwise experiencing financial hardship.

As with deferment, you must apply for forbearance, and you're not off the hook for payments until you've received official approval.

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