Leniency available on student loans

Federal student loan default rates are on the rise, but there’s no need even in this weak economy for you to fall into arrears.

That’s because when it comes to repaying an education loan, no one – except maybe Mom or Dad – is more lenient than Uncle Sam.

Can’t find a job? Or, the one you have barely pays the bills? Maybe you have decided to go back to school to wait out the recession. Whatever the situation, the government has options to provide relief from federal loan payments.

“If students are conscientious about it and they explore their options, there shouldn’t be any reason they would be in default, even if they don’t have a job,” says Mark Lindenmeyer, director of financial aid at Loyola University Maryland.

You run into trouble, though, if you blow off repaying the taxpayers who put you through school. The government comes down hard. It might garnish your wages, apply future tax refunds to the debt, prevent you from renewing a professional license, hit you with interest, late fees and collection costs, and even ding your Social Security benefits in retirement.

You’re in default if you haven’t made a payment for 270 days, although it may take an additional three months before the default is final, says Mark Kantrowitz, publisher of FinAid.org.

The government measures defaults over a two-year period, looking at borrowers entering repayment one fiscal year and defaulting by the end of the next.

At the first inkling that you might have trouble repaying your loan, contact your lender or loan servicer. For private loans, your options will depend on the lender. But here are some moves with federal loans:

Deferral: Loan payments can be suspended while you return to school half time or more. You also can defer payments for up to three years if you can’t find a job or have some other economic hardship, such as being on public assistance or joining the Peace Corps.

If the government paid the interest on your loan while you were in school, it will do so again in a deferment. If your loan wasn’t subsidized, you’ll owe the interest, which can be tacked onto the principal.

Forbearance: Don’t qualify for a deferral? Your lender or loan servicer may approve a forbearance where payments are suspended or temporarily reduced while you gain your financial footing. Interest will continue to accrue in a forbearance.

Repayment plans: The standard repayment is a fixed monthly sum for 10 years. If that’s a struggle, consider one of several other payment plans. Keep in mind that with these others, you’ll pay more interest over the life of the loan.

A graduated repayment plan, for instance, starts out with low payments that gradually increase (let’s hope, along with your income) over 10 years. An income-sensitive plan, available if you got a federal loan through a private lender, adjusts payments up or down based on income, usually over 10 years. Extended repayment is for those with more than $30,000 in loan debt, allowing them to stretch out payments for as long as 25 years.

Income-based repayment might be for you if your debt is steep compared with your pay. Payments are limited to 15 percent of discretionary income. It’s possible your payments could even be zero if earnings are low enough.

After 25 years of making payments under this plan, any remaining balance is forgiven. Debt can be forgiven even faster if you make 10 years’ worth of payments while working in public service.

Consolidation: You might also be able to lower your monthly payment by consolidating your student loans into one new loan and extending the repayment period. The higher the debt, the more time you get to repay.