Repaying Student Loan Debt

What Should I Do If I Can’t Make My Student Loan Payments?

If a borrower is having problems repaying a loan, he should contact the company servicing the loan or the school he attended. There are many reasons for being unable to make monthly payments, including unemployment. Some students haven’t developed debt management skills or assumed they would get a great, high-paying job after graduation. Some loans may be forgiven due to economic hardship. Other loans could be consolidated for a more manageable monthly payment.

Can I Cancel My Student Loan Debt?

There are many names for the process of reducing a portion or all of your student loan debt due to some extenuating circumstances: cancellation, deferment, dischargement, forbearance or forgiveness. There are subtle differences in the details of the processes – Deferment and Forbearance are temporary postponements of your repayment schedule; Cancellation, Dischargement and Forgiveness remove your entire debt permanently.

If you are having problems repaying your loan, then contact the organization servicing the loan before late fees are assessed. You might qualify for deferment or forbearance.

Deferment – This is a temporary suspension of loan payments due to specific reasons, like re-enrollment, unemployment, bankruptcy or economic hardship. Deferment can be made up to three years. If you have a subsidized loan, you don’t need to pay interest during deferment. If you have an unsubsidized loan, you do need to pay interest during deferment; unpaid interest will be “capitalized” – added to the principal balance.

Forbearance – This temporary postponement or reduction of payments due to financial difficulty is a possibility for those who don’t qualify for deferment. Applications must be made to the loan servicer. Interest continue to accrue on the unpaid principal. The student must repay the full balance. Forbearance is permitted for a period of up to one year with a maximum of 3 years.

The College Cost Reduction and Access Act of 2007 has assisted government employees with student loans by providing forgiveness after 10 years of service. Active duty military can get loan deferment. Some special education, science and mathematics teachers might have their loans forgiven.

What If I Default?

If you are having problems with making payments, contact the company servicing your loan. The process for falling behind in payments is gradual. Usually after graduation, the student has a grace period of six to nine months to initiate repayment.

Public government and private loans might be treated differently when the student defaults. The Higher Education Act of 1965 (Sections 400 to 498B) governs financial aid, federal loans and defaults.

If you default, the maturity date on each promissory note is accelerated – payment in full is immediately due. This makes a bad situation worse.

Certain government loans have very specific procedures governing default. For example, for a FFEL default to occur, the lender must exercise “due diligence” in attempting to collect the loan by making repeated efforts to locate you and remind you about repayment of the loan. If unsuccessful, then the loan is handed to the State Guarantor Agency. This must occur over a span of 270 days to qualify as default.

2 Types Of Debt Consolidation Loans: Secured Versus Unsecured Loans

A consolidation loan can be used to pay off multiple bills, enabling you to focus on one payment for ease of debt management. But, which type of loan should you apply for? What are the pros and cons of these consolidation loans? You have to understand them before you go and find a suitable loan for debt consolidation.

Basically, there are two types of debt consolidation loans: secured and unsecured loans. Let’s explore each of them:

Secured Loans

Secured debt consolidation loans require borrowers to pledge their asset such as home, boat or land to secure the amount of loan they plan to borrow from a creditor. The lender will normally approve for loan amount equivalent to 70% up to 85% of the asset equity in a secured loan application. Since the risk of lenders is reduced by holding the ownership of the asset, they are afforded to offer secured loans at much lower interest rates because they can execute foreclosure on the asset where ever the borrowers default the repayment on the secured loans.

Secured loans are the money you borrow from lenders using your asset as collateral. While it is a good idea to get a low interest rate consolidation loan to get rid of high interest rate debts such as credit card balances and personal loans, you should make sure you are able to make the repayment during the lifetime of the secured loan. This is to avoid putting your asset at risk of foreclosure.

There are a few types of secured loans that you can borrow against your asset. The most common types are Mortgage Refinance loan and Home Equity Loan. Mortgage refinance can be applied for the homes that are still in the process of paying a mortgage. Basically, you find a new mortgage to pay off the current mortgage and use the balance of the new mortgage to pay toward your debt. Home equity loan is very similar to a personal loan, but with low interest since it is secured against a home. You can only apply for home equity loan if your home has built up equity. You can use all the money borrowed against the home equity to pay toward the credit card balances and other high interest rate debts.

Unsecured Loans

Unsecured loans do not need any collateral and lenders are deciding the application approvals based on the applicants’ credit history. The interest rates offered in unsecured loans are dependent on the credit score, the higher the score, the better the rates are. The approved amount is based on the borrowers’ capability to repay the loan. Since the lenders don’t hold the ownership of any asset, they carry higher risk and they only can take a legal action if borrowers default the loan. The unsecured loans carry higher interest rates compare to the secured version. Most personal loans offered in the market are a type of unsecured loan. The applicants need to attach the proof of income and other supporting documents in their application. Lenders will request the credit reports from credit bureau to review the applicants’ credit history, if lenders found that the borrower is in high risk of defaulting a loan due to bad credit, they may not approve their application; or they may request the borrowers to get one or two co-signers with good credit history to co-sign the loan in order for them to approve the application.

Summary

Generally, there are two types of loans, the secured and unsecured loans. You should evaluate the pros and cons of them before you decide the best type of loan for debt consolidation.