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 usually won't wipe out your loans due to recent changes in the law, but there are alternatives. Understand your options for managing your student loans and keep your finances and credit rating in fine shape.

Making your loan payments is important, even when you're having financial problems or just looking at repayment options. You default on your loan when you don't make payments or try to renegotiate your payments, usually for the past 180 days. Once your loan is in default, most lenders won't agree to renegotiation. Nonpayment may limit your options, so it's worth your sacrifice to keep up your account while you find a solution.

There are several options for managing student loans, and only you can decide on the one that is best for your bottom line and your monthly budget.

Loan Deferment

If you aren't in default, you may be able to get your student loans deferred, which means repayment is suspended for a certain time. Deferment may be available if you:

• Are permanently or temporarily totally disabled
• Are completely unemployed
• Have a federal loan and can show economic hardship (as defined by the lender)
• Are enrolled in school
• Are in the military full-time
• 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 still accumulates during deferment.

Forbearance

Forbearance is when your loan payments are temporarily postponed or reduced due to financial problems. You may try to get a forbearance if you don't qualify for deferment. Interest continues to rack up whether loans are subsidized or unsubsidized. You apply for forbearance through your loan servicer, and it's very important to make your regular payments until your application is approved.

Loan Cancellation

Some situations may qualify you for loan cancellation:

• Permanent or temporary total disability
• Full-time military service
• Public service or working in areas of need in fields such as teaching, medicine and law
• Working in law enforcement, with certain loans
• Withdrawal from school or school closure before program completion without a refund

Renegotiating or Refinancing

Refinancing student loans isn't an option in the way you might refinance other consumer loans, such as your mortgage. However, you may be able to renegotiate a repayment plan that's more manageable. Remember that any time you extend the time for repaying your loan, you'll usually 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 may make 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)

You might look at using the proceeds from another loan, such as a personal loan or second mortgage, to pay off your student loans. There are pros and cons to this approach related to loan interest rates and payments, tax benefits and loan features.

Consolidation

Consolidating or combining all of your student loans may be an option. Consolidation gives you one interest rate and payment, and many federal loan types qualify. The downside is you'll likely have a longer loan period, and you may pay more interest over that time, even if your new monthly payment is lower. Crunch the numbers and see if consolidation would be a good deal.

If you go with a consolidation loan, do make sure you can accelerate payments without a penalty, just in case your finances improve and you want to pay off your loan early.

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.

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