Some options for delaying student loans

NEW YORK – You have a $120,000 college degree and no job. That won’t stop your student loan bills from arriving.

The six-month grace period on student loans for the class of 2009 is about to expire, meaning this year’s graduates will soon start getting their monthly statements. It could be a problem for those who have yet to find full-time work. Others who graduated earlier may also be struggling.

One option for anyone in a financial squeeze is deferment or forbearance, which allow for the postponement of payment under select circumstances.

“These are really important options for people who are struggling,” said Edie Irons, a spokeswoman for the Project on Student Debt, an advocacy group based in Berkeley, Calif.

There will likely be repercussions, but none as damaging as if you consistently make late payments or let loans lapse into default. So if you need extra time to pay your loans, here’s what you need to know.

Who’s eligible?

A deferment or forbearance is a period when payments on a loan are not required, although interest generally continues accruing. The difference between the two is that the term “deferment” is used in specific situations with federal loans.

Most people know federal student loans can be deferred if you enroll in graduate school or the military. But you can also get a deferment for unemployment or economic hardship.

To qualify for the latter, you can’t earn more than $16,245 a year in the continental United States. You’re also automatically eligible if you get public assistance, such as food stamps, or volunteer with the Peace Corps.

If you don’t qualify for a deferment, you might still be able to postpone payments if you’re dealing with health issues or other circumstances. The government calls this a forbearance; private lenders use the term for any type of postponement they grant.

With private loans, the lender has the discretion to grant forbearance.

Sallie Mae, the biggest issuer of private student loans, says its agents interview borrowers to assess whether forbearance is an appropriate solution.

How long will it last?

Economic hardship deferments are granted one year at a time, while unemployment deferments are granted in six-month increments. You can reapply as needed for a total of three years each.

That means you could get an unemployment deferment for three years, then an economic hardship deferment for another three years. The deferments don’t have to be used continuously.

You could also reset the time limits on deferments if you consolidate a loan, since it’s essentially a new loan, said Irons of the Project on Student Debt.

The terms of forbearance for federal loans are tailored to specific situations, so there are no set rules on how long they last.

Expect less leniency with forbearance on private loans.

What are the drawbacks?

These measures should be used as a last resort, since interest generally continues accruing on the loan.

One way to minimize the financial impact is to pay the interest costs while your loan is in deferment or forbearance. Otherwise, it will be added to the loan amount and push up what you ultimately owe.

For example, let’s say your principal loan amount is $15,000 with a 9 percent interest rate.

Your monthly payments after a 12-month deferment would be $207 if you didn’t pay interest during the deferral, versus $190 a month if you did.

That’s assuming you’re repaying the loan over 10 years.

“The danger is that people are likely to come out of forbearance owing more overall per month than they did before,” Irons said.

Are there other options?

One alternative is picking a payment plan that reduces your monthly bill. Of course, this means it will take longer to pay off your loans, which in turn pushes up how much interest you pay.

Another relatively new option for federal loans is the Income-Based Repayment program. The program caps monthly payments at 15 percent of your earnings above a certain threshold, currently around $16,000. Those who earn less than that may not have to make any monthly payments.

Any debt remaining after 25 years is forgiven. Eligibility is determined by weighing your debt level against your income. A calculator at www.ibrinfo.org can help assess whether you qualify.

You can also change payment plans with private loans. Or your lender may be willing to rework the terms of your loan, perhaps with a lower interest rate.

What if I ignore bills?

The benefit of getting a deferment or forbearance is that your loan remains in good standing, and there is no impact on your credit report.

Otherwise, federal loans usually go into default if you don’t make payments for nine months. Sallie Mae says its private loans typically go into default after seven months.

Either way, a default sets off a chain of damaging repercussions.

It’s a black mark on your credit report, meaning it will be difficult for you to get a credit card, mortgage, or any other type of loan.

In default the entire balance of your loan becomes due. Your loan might be turned over to a collection agency, and you’ll be liable for the costs of collection. Your wages could also be garnished, and your federal and state tax refunds could be intercepted.

Student loans typically aren’t discharged with a bankruptcy, either. And once the loan is in default, you can’t get a deferment or forbearance. So don’t let it reach that point.