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October 28, 2011
7 Ways to Avoid Student Loan Default
When you’re out of college and low on money, you may be worried about making your student loan payments. Missing payments can seem scary, because there are serious consequences for defaulting on your loans.
Here are 7 options that can to help you manage your federal student loans and avoid default. Talk to your servicer (the company that sends your student loan bills) to take advantage of these options.
Choose a Different Payment Plan.
Are your monthly federal loan payments too high and your income too low? Selecting a different repayment plan might be the answer. Selecting a different repayment plan could reduce your stress by reducing the amount you owe each month. Here are 5 repayment options you can talk to your servicer about:
- With the income-based repayment (IBR) plan, you can cap your payments at 15 percent of your monthly income and, after 25 years of on-time payments, any outstanding balance will be forgiven. Plus, for loans taken out after 2012, the cap drops to 10% and forgiveness begins after 20 years.
- With the graduated repayment plan, you can make payments as low as the interest accruing on your loan without increasing the standard 10-year payment period.
- The extended repayment plan can decrease the amount you owe each month by extending the amount of time you have to complete your repayment. The extended repayment can also be combined with the graduated repayment to allow you to extend the term and reduce your monthly payments.
- If you are a Federal Family Education Loan Program (FFELP) borrower, you can set your student loan payments between 4 and 25 percent of your monthly income with the income-sensitive repayment plan.
- If you’re a Direct Loan program (DL) borrower, you may qualify for the income-contingent repayment plan, based on your income, family size, and total amount of direct loan debt. Plus, after 25 years of eligible payments, any outstanding balance will be forgiven.
Note: if you choose to change your repayment option from the standard repayment plan, you will pay more in the long run because the lower payment amount will cause more interest to accrue over time.
Even a new repayment plan might not get you out of the woods completely. If you’re having trouble making your federal student loan payments, you have 2 additional options that can temporarily postpone your monthly loan payments: deferment and forbearance.
Consider a deferment if you are currently:
- Experiencing economic hardship.
- Enrolled in school at least half time.
- On active military duty.
Plus, deferment temporarily stops interest from accruing on your subsidized federal loans.
Economic struggles and illness can make it hard to make your student loan payments, but that may not qualify you for a deferment. Still you may be able receive forbearance. Similar to deferment, forbearance allows you to postpone student loan payments. However, interest on your subsidized federal loans will continue to grow.
We’re Here to Help
At American Student Assistance® (ASA), we’re on your side. We help student loan borrowers make informed financial decisions and manage their education debt successfully. Please contact us if you have questions about your loans at any point during your financial aid process—especially if you are about to miss a payment or have been late making payments.
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