There are options available to you if you cannot make payments on your student loans. The best approach is to acknowledge the situation as a problem, and then take steps to help yourself and your financial condition. This will help you avoid defaulting on the loans, which will significantly damage your credit and increase the amount you owe. If you are having trouble making payments, options include:
- Loan cancellation
- Postponing payments through forbearance or deferment
- Filing bankruptcy and discharging the loans
A forbearance is a postponement of payments whereby the loan holder (the bank or agency that granted you the original loan) allows you to stop making payments for a certain period of time. Forbearances apply only to the principal sum owed, so interest will continue to accrue. Forbearances are easier to get than deferments, but are less attractive since your total balance due will increase during a forbearance because of accruing interest.
Deferment is a postponement of loan payments based on a certain condition being met for a certain amount of time. For example, you may be able to get a deferment for being unemployed or for going back to school. The length of extra time a deferment gives you varies depending on the loan, and sometimes deferments postpone payments of both the principal due and the interest. It is never possible to receive a deferment if you have defaulted on the loan.
A law was passed in 1998 that has made it even more difficult to discharge a student loan in bankruptcy. It is incredibly difficult to discharge a loan in this way, and the only approach is to convince a court that repaying the loan would create a severe hardship for you.
Severe hardship consists of a few core elements:
- Paying off the loans would result in failure to maintain a “minimal” standard of living.
- Circumstances dictate that this low standard of living would persist for the foreseeable future.
- You made a good faith effort to repay the loans
Although these elements seem easy to fulfill, the legal meanings of the ambiguous phrases prevent the vast majority of debtors from pursuing discharge through bankruptcy. A “minimal” standard of living means living below the poverty line in the state in which you reside; the standards will slightly differ state by state.
The circumstances which force a debtor to live this way for the foreseeable future have to be outside the normal hardships that most people experience. Unemployment, for example, is NOT a circumstance which could fulfill this element. An inhibiting medical condition is one of the few examples which might be deemed an acceptable circumstance.
Finally, the debtor must be perceived as a responsible person with some bad luck being crushed by mounting debt. This last element is designed to prevent people from abusing the bankruptcy system to avoid payment of money that they legally owe to others.
You may be able to cancel all or part of your loan by:
- Teaching needy people (including disabled and low income populations)
- Joining the military or other uniformed service
- Performing community service
- The university you attended closes down
- The university was falsely certified
- As a refund for a school you applied for but never attended
Cancellation of loans means that the loans are wiped, any expected payments in the future are canceled and prior payments are reimbursed. Although cancellation might sound even better than discharge through bankruptcy, remember that loans are essentially a contract. If a school is unable to fulfill its end of the contract, then the school should and wouldn’t be paid for services not rendered.