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I read the other day that the average college student graduates owing about $30,000 in student loan debt. That’s a big load of debt. People who are either good or lucky or good and lucky land a good paying job and can pay back heir loans. But let’s suppose you weren’t so lucky (or fortunate). The only job you were able to find pays just $30,000 a year and you can’t see any way to pay back that $20,000 or $30,000 you owe.
Your alternatives
You might be tempted to just walk away or default on those loans. If this is the case, we have one word for you.
Don’t.
What it means to default on your loan
Once your grace period is up you’re responsible for repaying your loan. If you don’t make arrangements to pay back the loan and ignore all efforts by your lender or loan servicer to contact you about setting up a plan, you will be in default. You will also be in default if you fail to keep up with your payments.
How to avoid defaulting
Of course, the best way to avoid defaulting on your loan(s) is to keep up with your payments. If you realize you can’t keep making them for some reason, you need to contact your lender or loan servicer. You should also review you budget to see if there are places where you could cut your spending so you could continue making your payments. You could get a second job or try to switch to a less expensive payment plan.
Try for a deferment
If you can’t make any of these options work, you could try for a loan deferment or forbearance or file for bankruptcy. If you’re not familiar with a deferment, it’s a period of time during which you don’t have to make any payments. This is usually three years or less. To get a deferment you will need to fill out an application and meet certain eligibility requirements. For example, you would need to be enrolled at least halftime in an eligible school, be unemployed or in a graduate fellowship program. You could also be eligible if you were in the military or had suffered a severe economic hardship.
What is forbearance?
Forbearance is where you either postpone your loan payments or reduce them for a period of time, which is typically between one and three years. To qualify for a forbearance, you must show that your health is very poor or you have some other personal problem that makes it it tough for you to keep up with your payments. You might also qualify if you have a medical or dental internship or residency or if the amount you’re supposed to pay on your student loan is equal to or greater than 20% of your gross monthly income. As you might guess, only your lender can give you forbearance. You will need to contact it to learn if you might qualify.
The consequences are ugly
If you choose to default on a student loan, you may have to pay the full amount you owe and not just the amount you’re past due. You will owe late fees and collection costs. Your credit will be seriously damaged. Your income tax refunds could be seized and applied to your balance owed. Your wages could be garnished. You won’t be eligible for a student loan deferment or forbearance. And heaven forbid, your loan might be turned over to a collection agency.
The worst option
The worst option for dealing with student loan debt is to file for bankruptcy. However, this will not wipe out your outstanding student loan balance unless you can get what’s called a hardship discharge. This is very difficult to do. You must be totally broke and prove to the court that you have made a good faith effort to pay back the loan before you filed for bankruptcy. If you would be ineligible for a hardship discharge, you can still file a Chapter 7 and would not have to pay on your loan while you were in bankruptcy. However, once the bankruptcy is over, you would have to resume making your payments.
