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10 Strategies for Dealing with Student Loans to Protect Your Credit

Student loans are hard to live with and, for many, hard to live without! So how do you get the benefits you want and need without the risk of owing more than you can pay?

Know how student loans are reported

Most of the loans that are reported on your credit bureau files get reported just once. Student loans are an exception. Depending on how your education is funded, you may have a new loan every semester. That equates to a total of eight loans hitting your credit report.

Another unique feature of student loans is that they are not normally dischargeable in a Chapter 7 bankruptcy.

The collection process

You’ll want to handle any collection process quickly. Private student loans may charge off in as few as 120 days rather than the traditional 180 days for normal loans. Early action can enable you to handle loan issues quickly with the servicer rather than a collection agency.

Before you call or write to the loan servicer, organize your thoughts. Explain coherently why you weren’t able to pay. Call the U.S. Department of Education information line at 800-872-5327.

Identify the best repayment option for your situation

A huge number of repayment programs are available, and they change all the time. Check out the big sites that deal with them, such as Federal Student Aid and FinAid.

Here is a synopsis of what’s currently available and how each plan works:

  • Standard Repayment Plan: Payments are fixed.

  • Graduated Repayment Plan: Payments are made for up to ten years. They begin at a very low rate and increase every two years.

  • Extended Repayment Plan: Payments are made for up to 25 years.

  • Income-Based Repayment Plan (IBR) caps your monthly payment based on your income.

  • Pay as You Earn Repayment Plan is an income-sensitive plan.

  • Income-Contingent Repayment Plan is for Direct Loans only.

  • Income-Sensitive Repayment Plan is for FFEL loans only.

Take your loans to bankruptcy

Most debtors do not qualify to discharge student loan debt in a Chapter 7. The exception comes when you can prove to the court that repaying your student loans would cause you undue hardship.

Here are some factors the court may look for:

  • Poverty: You can’t maintain a minimal standard of living if you are forced to repay your loans.

  • Persistence: Your current financial situation is likely to continue.

  • Good faith: You have made a good-faith effort to repay your student loans.

The prospect of default

Before you can be late on your loan, you have to have used up your grace period. Here are some simple steps that may help keep you out of trouble:

  • Keep in communication with your lender or servicer.

  • Find out which plans are available to you.

  • Private loans are not eligible for income-based repayment or other federal plans, deferments, or forgiveness.

  • Community banks and credit unions are good places to look for refinancing options.

Student loan forgiveness

Following is a summary of the types of loan absolution that are available. Different rules govern different loans.

  • Total and Permanent Disability Discharge: This is for those who have been permanently disabled by military service or those receiving Social Security Disability.

  • Death Discharge: If you die, no loan.

  • Discharge in Bankruptcy: Only possible in certain situations.

  • Closed School Discharge: Direct Loans and FFEL are forgiven if your school folds.

  • False Certification of Student Eligibility, Unauthorized Payment Discharge, Unpaid Refund Discharge: Your school has to have messed up in a major way.

  • Teacher Loan Forgiveness: This is for those who have taught full-time in a low-income elementary or secondary school for five consecutive years.

  • Public Service Loan Forgiveness: This is for or those employed in specified public service jobs and who have made 120 payments on your Direct Loans (beginning after October 1, 2007).

  • Perkins Loan Cancellation and Discharge: This is for those in certain types of public service.

You can find more info at Studentaid.gov.

Lower Your Bill While You’re in School

Consider these strategies to reduce or eliminate your interest buildup.

  • Pay your interest as it accrues.

  • Pay both interest and principal.

  • Work a little to save a lot.

Paying off interest early may result in a refund that you could use to prepay a portion of your loan to lower the cost of your loan even further. Sweet! See IRS Publication 970 for details.

Keep up with your loans after you’re out

You need to make payments to your loan servicer. Each servicer has its own process. You are responsible for staying in touch with your servicer and making your payments, even if you do not receive a bill.

You may be able to consolidate your loans. You may also want to consider loan forbearance or deferment to temporarily reduce or postpone payments if you go back to school, join the military, or experience a hardship.

Set limits during the planning and application process

Deciding your financial limits early in the game saves you from the emotions that are sure to surface as you narrow down your choices. Begin by setting a value for the education you’re pursuing get in the field you plan to enter. Consider community colleges.

Shop around with different types of lenders, including the government, private nonprofit sources like your state student loan authority, private lenders, banks, and credit unions. Give extra points to those lenders that service the loans they originate.

Get help if you’re in the military

The GI Bill offers substantial benefits to service personnel who have at least 30 days of active duty. Be sure to check your eligibility before you take on any student loan debt. Here are three simple steps to consider:

  • Reduce your interest rates.

  • Opt for Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF).

  • Manage your private loans.

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