Student Loans – How to Prevent Defaulting on Your Loan?

There is no rational reason for a borrower to be delinquent or default on their loans because there are several options for debt relief.

Student loan defaults have risen for the sixth straight year according to the Institute for College Access & Success. The percentage of borrowers who defaulted on their federal student loans within two years of their first payment jumped 9.1% in fiscal year 2011, up from 8.8% the previous year. A mid-2012 briefing paper by the Economic Policy Institute says that young people, including those with a college degree, face an unemployment rate that is double that of the older generation. It suggests that the unemployment rate is not due to a lack of skills for a given job, but because there are just not enough jobs available in the market.

For the first time on record, delinquency rate on student loans has jumped above the rate for credit cards, car loans or any other kind of consumer loan. The government projects that roughly one in five borrowers who took out federal loans for undergraduate study will default at some point in their lifetime. Defaulting on a student loan can have several serious consequences including adding significantly to the cost of the loan and ruining the borrower’s credit score, not to mention that student loans are generally not dischargeable through bankruptcy.

According to Mark Kantrowitz of FinAid.org, there is no rational reason for a borrower to be delinquent or default on their loans because there are several options for debt relief. Here are two options to consider if you’re near defaulting on your student loans.

Postponing Repayment

Two options available for postponing repayment of your student loans are deferments and forbearances. If you are thinking about defaulting on your student loans, ask the lender whether you are eligible for deferments and forbearances before you default.

Deferments allow you to postpone repaying the principal of your loan for a specific period of time. Most federal loan programs allow students to defer their loans while they are in school at least half time. Deferments are commonly granted for students who are enrolled in undergraduate or graduate school, disabled students who are participating in a rehabilitation-training program, unemployment or economic hardship, though different loans have different rules so you need to check which rules apply to the student loans you have.

Forbearance allows you to postpone or reduce your payments, but the interest charges continue to accrue. You can pay the interest during forbearance or allow the interest to accrue. If you don’t pay the interest on your loan during forbearance, it may be added to your principal balance, and the amount you pay in the future will be higher. Note, there are limits on the length of forbearance. Forbearances are typically granted in 12-month intervals for up to three years.

Keep in mind that these are both temporary solutions to your financial problems. You cannot receive a deferment or forbearance if your loan is already in default and if you default on your loans you are no longer eligible for deferments and forbearances. Also, deferments and forbearance are not granted automatically. You must submit an application and provide documentation to support your request.

Westface College Planning can help you navigate the college planning process from start to finish. To learn how we can help you wade through your student loan options call us at 650-587-1559 or sign up for one of our Tackling the Runaway Costs of College Workshops or Webinars.

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