College debt looms large on the household balance sheet. More than 37 million Americans owe $902 billion in student loans. That’s more than consumers have collectively borrowed for vehicles or charges on credit cards. Student loans are the only form of household debt that has grown since the financial crisis.
Delinquency rates among various age groups can run has high as 11.9 percent, but people under 30 have a delinquency rate of 6.2 percent, according to the latest date from the Federal Reserve Bank of New York. If you are about to miss a student loan payment, here’s what you need to do:
Step 1. Determine your loan type — public or private?
We are not talking about schools, but loans. The period between missed payment and default of a federal student loan and one from a private lender is dramatic. With a federal loan, you can miss payments for up to nine months before the loan is considered in default. It will still be considered delinquent, which will affect your credit score, but not as drastically as default.
With a private lender, one missed payment will usually mean you have defaulted on your loan. Plus, private lenders will penalize late payments with additional fees and charges that can add to your debt load. If you are choosing between which loan to pay first, choose your private loans because federal loans are much more forgiving of late payments.
In default, you wages can be garnished, you can be sued for the amount owed and, with federal loans, you can have your federal benefits and tax refunds taken.
Step 2. Call your loan servicer.
Talk with your servicer about why you are missing a payment and see if you can work out some type of repayment plan. Keep a record of your interactions with the servicer and all related documents. Be clear, calm and concise in all your correspondence.
With federal loans, you can choose between deferment or forebearance. With a deferment, you still pay the interest on the loan, but repayment of the principal balance is delayed. You can qualify for deferment if you go back to school, are unemployed or have some sort of economic hardship.
If you don't qualify for deferment, seek forebearance, which means reduced or no payments on your student loans for up to 12 months. However, the interest on your loans will still accrue. You automatically qualify for forebearance if the total amount you owe each month for all the student loans is 20 percent or more of your total monthly gross income.
Private lenders vary on their approaches to deferment and forebearance, most are much tougher than those offered by federal loans. If you have an issue with a federal loan that you cannot resolve, you can take your case to the Federal Student Aid Ombudsman Group, a meditator of loan disputes at the Department of Education.
Step 3. Try income-based repayment.
If you spent more than 15 percent of your discretionary income on student loan payments, you can qualify for lower federal loan payments under the Income-Based Repayment Plan. After 25 years under such a plan, your remaining loan balance will be forgiven. But there are drawbacks — you will pay more interest under income-based repayment, you'll have to submit annual documentation and pay taxes on any amount that is forgiven.
Use this calculator to determine what your payments would be under income-based repayment.
Step 4. Seek forgiveness.
Numerous programs will cancel part or all of your federal loans if you volunteer, serve in the military, teach or work for a federal agency. FinAid, an excellent website for financial aid information, provides a list of the programs available.
Step 5. Consider bankruptcy if all else fails.
If the burden is too great, bankruptcy can be an option. But student loans are difficult to discharge in bankruptcy because you must prove “undue hardship,” which usually means showing the court you can't maintain a “minimal” standard of living — think poverty level — with your student loan debt and your financial hardship will persist for some time.
Student Loan Borrower Assistance details how that process works if you choose to go this route.