If you apply for financial aid in order to pay for your higher education costs, you may be offered loans as part of your school’s financial aid offer. A loan is money you borrow and must pay back with interest.
If you decide to take out a loan, make sure you understand who is giving you the loan and the terms and conditions of the loan. Federal student loans are funded by the federal government and usually have more benefits than loans from banks or other private sources. Private student loans are funded by private sources such as a bank, credit union, state agency, school, or other organization.
WHAT ARE YOUR RIGHTS?
You must repay your loans if you don’t complete your education, can’t find a job related to your program of study, or are unhappy with the education you got using your loan. You also can’t claim that you have no responsibility for repaying your loan because you were a minor (under the age of 18) when you signed your loan documents or received the loan. However, certain circumstances might lead to your loans being forgiven, canceled, or discharged. It is very rare to qualify for any of these.
Examples of when student loans can be forgiven, canceled, or discharged include:
- Public Service Loan Forgiveness, Teacher Loan Forgiveness
- Perkins Loan Cancellation (includes Teacher Cancellation)
- Total and Permanent Disability Discharge
- Death Discharge
- Bankruptcy Discharge (in rare cases)
- Closed School Discharge
- False Certification Discharge
- Unpaid Refund Discharge
Deferment and forbearance can allow you to temporarily stop making payments on your student loan or temporarily reduce the amount you pay each month when you can’t afford to make the regular monthly payment.
The major difference between is that forbearance always increases the total amount you owe on the loan, while deferment can be interest-free for certain types of federal loans. When considering deferment versus forbearance, the right choice will depend on your personal situation:
Deferment: While your payments are put on hold, you may not be responsible for paying the interest that accrues on certain types of loans during the deferment period. If you have subsidized federal student loans or Perkins loans, and you are unemployed or dealing with significant financial hardship, this is generally the better choice.
Forbearance: During a forbearance period, you are responsible for paying the interest that accrues on all types of federal student loans. If you don’t qualify for deferment and your financial difficulty is temporary, this is generally the better choice.
You MUST continue making payments on your student loan until you have been notified that your request for deferment or forbearance has been granted. If you stop paying and your deferment or forbearance is not approved, your loan will become delinquent.
While both options can help you avoid student loan default, neither is a good long-term solution. If you don’t expect your financial situation to improve, consider enrolling in an income-driven repayment plan instead of pausing repayment.
Federal student loans have additional payment options associated with income-driven repayment programs, like the Pay As You Earn plan, known as PAYE, or the Income-Based Repayment Plan, often called IBR.
The statute of limitations is simply the time limit set for when a creditor can sue for failure to pay the debt. A statute of limitations applies to private student loans but not to federal student loans, such as Stafford, Perkins, Parent PLUS and federal consolidation loans. With federal student loans, the lender is entitled to collect on the debt until death or until the debt is discharged – meaning the debt never goes away. There is no statute of limitations.
When you default or become delinquent on your student loans, the failure to pay the loans will stay on your credit report for seven years from the original delinquency date of the debt. But there is one type of federal loan — a Perkins loan — that can stay on your credit report until the loan has been paid in full, even if it is longer than seven years. This is not true for other types of student loans.
To collect on these loans, the Department of Education does not need to sue a borrower in court to collect the remaining amount due on the loan. It may intercept your tax refunds, it can offset social security income, and it may administer wage garnishments.
With private student loans, you typically have fewer repayment options, especially when it comes to loan forgiveness or cancellation. To explore your options, contact your loan servicer directly. You can find the loan servicer on your recent billing statement to determine who receives your monthly payment.
Most have a five-year Statute of Limitations and the lender may not be able to continue to collect the debt if more than five years goes by without making a payment, however every payment made causes this time to be reset.
Student loans that you have defaulted on or are delinquent on are going to stay on your credit report for seven years from the original delinquency date of the debt.
Collection of private and federal student loan debt is regulated by the Fair Debt Collection Practices Act. The FDCPA protects borrowers from being misled, harassed or subject to abusive practices by debt collectors. Like collection of an outstanding credit card balance, a debt collector may not threaten legal action, unless they are going to follow through with legal action. Debt collectors cannot misrepresent the amount owed or lie about how and when the debt can be collected.
WHAT DO YOU NEED TO DO?
Request deferment or forbearance when you are not able to make your payments. Contact your lender to determine the best repayment option for you.
A repayment plan that is dependent upon your employment income may work best for you, especially if the type of work you do changes over time or is unpredictable.
In order to set up an income-based repayment plan for your Federal Loans, they cannot be in default.
WHAT TO CONSIDER BEFORE TAKING ACTION.
Understand the terms and conditions of your student loans. The first step is to find out if your loan is Federal or Private.
Most private and federal student loans cannot be discharged in Bankruptcy.