If you borrowed money for college through federal programs and are struggling to repay the loans, the situation may not be as bleak as you think. Federal education loans come with exceptionally flexible terms that can help you climb out of a hole without affecting your credit score or access to future student loans.
In cases of economic hardship, for example, you can request a loan deferment, which can buy you a respite of up to three years. During that time, you won't have to make payments, and interest won't accrue on federal Perkins loans or subsidized Stafford student loans. Eligibility for deferment depends on your economic status.
You can also obtain relief by requesting forbearance on your loans, although interest will continue to accrue. Forbearance is basically a permission slip from the lender to halt payments for a certain period; you should qualify if a loan is not already in default. Lenders can grant forbearance for up to 12 months at a time, for a maximum of three years (call the U.S. Department of Education's Direct Loan Servicing Center at 800-848-0979 for information). Private loans, however, usually don't have such lenient terms. Contact your lender to explore your options.
If a loan is already in default, you may still have time to set things right. An official default on a monthly repayment schedule occurs when no payments have been made for 270 days. But lenders don't have to report the default to their guaranty agency for another 90 days, says Mark Kantrowitz of FinAid.org. If a payment is made before the lender reports a default, he says, "you'll still be delinquent unless you pay the debt in full, but it won't be recorded as a default."
Call immediately to find out whether the grace period is still applicable in your case. If not, the situation isn't hopeless. A default will stay on your credit report for seven years, and it prohibits eligibility for forbearance, deferment and further access to additional federal student loans. But it is also 100 percent fixable. Completing a loan-rehabilitation program will remove the blot and reinstate all those privileges. Loan rehabilitation involves making payments within 20 days of the due date for nine of 10 consecutive payment periods. Call the Department of Education at 800-621-3115 to begin rehabilitating your loan.
Elizabeth Ody is a staff writer at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.