Stern Advice: What to do if buried in student loans

WASHINGTON, Sept 21 Wed Sep 21, 2011 12:38pm EDT

WASHINGTON, Sept 21 (Reuters) - It's a tough time to be a former student. The lousy job market is bad enough, but two in three recent graduates are carrying education loans averaging $24,000. Graduates from high-priced schools may have double or triple that amount of debt, and not any more luck finding well-paid jobs.

Defaults are up, the Department of Education just reported. But in most cases, simply not paying isn't a real option; it's easier to walk away from a house than from a student loan.

If you stop making payments on a federal student loan, Uncle Sam will hunt you down and haunt you forever. Really. You can hide for 45 years and then find your Social-Security check clipped to repay your student loans.

But that doesn't mean you have no recourse. There are a few moves you can make now to lighten your load.

Here's a quick guide to your options:

-- Learn about your lenders. It's important to know the difference between government loans, which may be serviced by a private company like Sallie Mae, and private loans, which may have been issued by a company like Sallie Mae. The bills might look the same, but the loans are very different in terms of the available repayment options and the way borrowers are treated when they fail to repay. Step one: Make a list of all of your loans by lender.

-- Tackle your federal loans first. Federal student loans really never do go away, so make those payments a priority. If you're already in default, do whatever it takes to get your loan rehabilitated and back to current, counsels Deanne Loonin, a student loan expert with the nonprofit National Consumer Law Center. That's because federal loans that are paid up to date are eligible for some remedial programs, including loan consolidation and income-based repayment.

-- Sign up for income-based repayment. There is a relatively new and underutilized government program that allows low-earners and no-earners to squeeze their payments down to an affordable level. "It's assurance that your loan payments won't put you in the poorhouse," said Lauren Asher, president of the Institute for College Access & Success, an advocacy organization. "You still have to pay them back but it is manageable."

Under some circumstances, the government will even pay the interest on your loans for up to three years. If you spend your whole career in a public service or low-paying job, you may even get loan forgiveness after 10 or 25 years. The rules are complex; you can find out details and whether or not you are eligible at IBRinfo.org. (www.ibrinfo.org).

-- You can defer your federal loans. If you are unemployed, in the military, in graduate school or suffering other economic hardship, you may be able to get a complete deferral of your loan for up to three years. But don't do this unless you have to, because in many cases your interest will continue to accrue. That means you will owe even more when you finally face the music. It's a decent stop-gap strategy if you're jobless, though. Or if you're doing something with your life that will increase your earnings potential down the road.

-- You can consolidate your student loans. The Department of Education allows you to roll your various federal loans into one. This can be good if you're having trouble making payments, because it may enable you to stretch your repayment period out over a much longer time period -- as long as 25 years. But the interest rate on your new loan is unlikely to be lower than your existing loans, so it may not save you money in the long term. You can calculate the best deal for yourself among the various government loan programs with the excellent consolidation calculator at the Department of Education's Website. (www.direct.ed.gov/calc.html)

-- You can cry about your private loans. "These are the worst kind of loans," says Asher. Private loans are not dischargeable during bankruptcy; they may not have any formal forbearance programs at all, and it's up to the individual bank to decide if they want to help you reduce your loan size or rate. At mega lender Sallie Mae, troubled borrowers can usually switch to different payment plans, temporarily, that will reduce their monthly payments but not the size of their debt or their interest rate, says Patricia Christel, a company spokesperson. Sallie Mae will defer loans for grad students, but then you end up owing that much more when you're done.

-- Consider the consequences of default. Fewer people are actually walking away from private loans than they were a couple of years ago, says Christel. But some borrowers are. When you default on a private student loan, it will get reported to the credit monitoring agencies and will show up on your credit scores. A bad mark like that typically remains for seven years, and in some cases even longer, say experts at FICO, the premier credit scoring company and CreditKarma, a credit scoring research site. The further into the past the default recedes, the less impact it will have on your score, so it may not ruin your ability to borrow money forever. But it will hurt, and if the lender decides to chase you via collectors or a lawsuit instead of writing off your loan, that could stretch out far into the future.

-- Call in the feds. If you think there is some reason why your loans aren't completely kosher, like they were foist upon you by a questionable school or lender or you didn't understand them, you can complain to the new Consumer Finance Protection Bureau. That agency does have some regulatory authority over student lending, and is looking at that space.

"We will be on the lookout for problems in the student loan market," says Raj Date, a senior official at the new agency. "If problems in this market warrant action, we will not hesitate to use the tools that Congress has given us."

It's not clear that the agency can or will offer individualized relief. But at least you may help the next student in line.

(The Personal Finance column appears weekly. Linda Stern can be reached at linda.stern(at)thomsonreuters.com)

(Editing by Gunna Dickson)

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