Defaulted Student Loans: How to Pick Up the Pieces

by Chad Agrawal

Default on Student LoansThe worst thing you can do is ignore your student loan debt. This stuff just doesn't go away. It accrues interest - interest that sneaks up on you until it smacks you in the face with a loan size that you have no hope of repaying. You don't want to be shackled to this debt for the rest of your life, but you're not sure what to do. It's time to be proactive.

Call Your Servicer Immediately

The first thing you need to do is call your loan servicer immediately. The bank or lender that issued the loan is going to want its money. If you're finding it harder and harder to make payments, ignoring the lender isn't going to help. What will help is open communication. By opening the lines of communication, you demonstrate that you're not trying to hide from your debt. This will make it a lot easier to negotiate repayment on your terms.

Request a Deferment

Your federal and private student loan debt is piling up. If you can't make any of the payments, request a deferment or forbearance. These aren't ideal options, since the interest keeps accruing, but it does buy you time - time that you might need to get a second job, pay off other debts, or figure out how to come up with some money to continue making your loan payments. Typical deferments last about six months. After that, it's time to call the loan servicer again and ask for alternative payment methods.

Request a Graduated Payment Plan

A graduated payment plan is one where payments start out low and increase every two years. The benefit of this type of arrangement is that you receive some financial relief immediately. Yes, you still have to make loan payments. No, the interest doesn't stop (does it ever?). However, it does give you breathing room. After the first two years are up, you'll need to come up with more money. Hopefully by then you'll have it. The term of the repayment plan cannot exceed 10 years.

Request an Income Based Repayment Plan

Income-based repayments are just as they sound. They're based on your income. Under this plan, monthly repayments are made based on your income during which you suffer a partial financial hardship. Your monthly payment may be adjusted annually. The maximum repayment period under an income-based repayment plan can exceed 10 years, unlike the graduated plan.

Request an Income Contingent Repayment Plan

Income-contingent repayment plans are very flexible. They give you the option to repay your plan based on your income, but are different from the income-based plans. The amount you pay each year is calculated based on your adjusted gross income. It's the lesser of:

  1. 1. the amount you would pay if you repaid your loan in 12 years multiplied by an income percent factor that varies with your yearly income or;
  2. 2. 20 percent of your monthly discretionary income;

The maximum repayment period is 25 years. In other words, you must repay your loan within 25 years under this repayment plan. If you can't repay the loan in 25 years, the remainder is discharged. You may have to pay taxes on any discharged amount. Considering the terms and conditions of many student loans, this might be quite generous compared to other repayment options.

About The Author

Jeremy S works as a finance consultant with young people. He blogs about a range of finance topics for money and lifestyle blogs. Click the link for Sallie Mae student loans.

This post was written by Chad Agrawal

Chad Agrawal is the founder of CCTS, helping students transfer from community college to Ivy League, tier 1 or anywhere else by following this community college guide.

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