A theme of my posts has been to avoid student loan debt wherever possible. However, that advice isn’t very helpful for someone who already has a large amount of loans. Sometimes, there are situations where the normal methods will not help. This post is for the catastrophic situations, where someone has too large of a debt than they can feasibly pay.
For federal loans, there are two options known as deferment and forbearance that a person could take if their loan payments have become too much for them to pay.
The two most common ways a person could qualify for deferment is economic hardship or a period of unemployment or inability to find full-time employment. If you qualify for a deferment under these situations, you can have payment of principal and interest delayed for up to 3 years.
Under this delay, your principal and interest payments will be halted. For subsidized loans, the government will pay the interest on the loan during the delay, just as it does while you are still in school. For an unsubsidized loan, interest will still accrue but does not need to be paid until the deferment period is up.
If you don’t qualify for a deferment, you could request a forbearance from your loan provider. Under a deferment, your loan payments could be stopped or reduced for up to 12 months. The amount depends on your exact situation. There are two types of forbearance a person could do, discretionary and mandatory.
For discretionary forbearance, it is up to the loan servicer whether they will grant you the forbearance or not. You can submit a forbearance request for either of the two following reasons; financial hardship or illness.
For mandatory forbearance, the loan servicer will have to grant you the forbearance if you meet the requirements. The most common reason for a mandatory forbearance is if your minimum monthly payment for all of your student loans is equal to 20% or more of your total monthly gross income.
These two options are really best when you are faced with a catastrophic financial situation where making your student loan payments is not possible, such as unexpected medical bills. In the event that you lose your employment, you will have to consider whether to apply for a deferment or income-based repayment instead. The better option will be based on your personal situation.
If you have been paying attention, you will probably have noticed that both of these options are for federal loans only. Again, the availability of options like these are another reason why federal loans are much better than private loans. Private loans are not required by law to have special options such as these, and most do not offer any. However, many people who are faced with an overwhelming amount of debt have a large amount of private loans in addition to their federal loans. So, what can a person do in this situation?
The worst thing anyone can do is nothing. It may seem crazy, but some people will simply stop making payments on their private student loans if it is too much. This will only make things worse, as your private student loan will go into default as soon as you miss one payment. Give my post here a read to see the problems that default can cause.
If you find yourself in a situation where you cannot make the payments on your private loan, pick up the phone and call the loan provider. The loan company wants your money (well, technically their money back plus interest). If you stop paying the company will not get their money, and they will have to go through a lengthy collections process in order to recoup just some of the money they’re owed. Trust me, neither you nor your loan provider want to go to collections.
If you call your loan provider and tell them that you can’t meet your monthly payments, they will most likely work something out with you. This may be a reduction of your monthly payment, or a postponement of payments for a short time. Again, the exact arrangement you come to will depend on your specific situation and loan provider. Regardless of the arrangement you make with the company, it will be much better than if you had defaulted on the loan.
Remember, when face with a crisis the worst thing you can do is nothing. If you find yourself in dire financial straits, the above options can help you make it out alive. Student loans don’t have to be your death knell, even in tough times there is hope!