Student loans and hardships
by William G. Lako, Jr.
May 09, 2013 11:35 PM | 2434 views | 0 0 comments | 27 27 recommendations | email to a friend | print
William G. Lako Jr.<br>Business Columnist
William G. Lako Jr.
Business Columnist
Sometimes extremely unfortunate circumstances happen to good people. A job loss, an extended illness or other economic hardship may make it difficult for you to repay your student loans. Federal Reserve Bank of New York estimates there are more than 5 million student loan borrowers who have at least one loan past due. Generally, when you have difficulty repaying your student loans, your first steps should be to consider a consolidation loan that allows you to extend your repayment period. Consolidation loans also offer graduated payment plans where payments start low and increase every two years. Additionally, there are repayment options that tie your monthly payment to your income when the financial hardship is a result of a low-paying career.

If your lack of cash flow cannot accommodate these payment options, you may consider deferment or forbearance. Deferment is a period during which repayment of the principal and interest of your loan is temporarily delayed. Some of the most common reasons for deferment include in-school status, up to three years during unemployment, up to three years during an economic hardship and during active military duty. During deferment, you do not have to make payments on the loan. Depending on the type of loan you have, the federal government may pay the interest on your loan.

If you cannot pay your planned loan payments, but do not qualify for a deferment, your loan servicer may be able to grant you a forbearance. Loan forbearance allows you to stop making payments for up to 12 months. There are two types of forbearance, discretionary and mandatory. Your lender decides whether to grant you discretionary forbearance, which you can request during financial hardship or illness. Some of the reasons your servicer must grant you mandatory forbearance include situations where the total amount you owe each month is 20 percent or more of your total monthly gross income, you are serving in a medical or dental internship and meet certain requirements; or you are a member of the National Guard and have been activated by a governor but you are not eligible for a military deferment.

Under certain circumstances, the government may discharge your student loans. Most commonly, discharged loans are part of the Teacher Loan Forgiveness and Public Service Forgiveness programs, or discharged after 25 years of payments with an income-based payment plan. However, your student loans may also be discharged in the event you are totally and permanently disabled; in the event of your death, and — in rare occasions — during bankruptcy. In this case, the bankruptcy court must find that forcing repayment would “impose undue hardship on you and your dependents.”

Above all, you should avoid defaulting on your student loans. Your school, your loan guarantor and the federal government all can take action to recover your unpaid loan balance. Your loan is considered delinquent after one day of a missed payment. Your loan is considered in default status after 270 days of nonpayment. In addition to severely damaging your credit, defaulting on a student loan may result in the government garnishing your wages and withholding your state and federal tax return.

William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
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