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What Every Student Ought to Know About Repaying Debt

student-loans-building-blocksStudent loans are a unique form of debt. Under heavy government intervention and complicated legislation, they follow different rules than car loans and mortgages. They can be daunting and confusing. And since you don’t have to pay them back right away – as long as you’re still getting a full-time education – it’s easy to put off thinking about how you’ll repay them. But it’s important to consider that up front because payment day will come, even if you don’t get your degree and even if you don’t get a job right after college.

Here are the most important points to consider about repaying your student loan debt.

Late Payments and Credit Scores

Student loans are like other loans in at least one way: Late payments will negatively affect your credit score. Both private and public lenders report your payment history to the credit bureaus, so the more you are late, the worse your credit will be.

While this may seem like a small problem now, if you still have a ways to go with college, it could end up costing you thousands of dollars later when you need a loan for a house or a car. Lenders will charge you higher interest rates because they will think you are “risky” and less likely than others to pay them back on time. Even worse, too many late payments or a default on a student loan will make you ineligible for some loans, meaning you might not be able to buy that house or that car a few years down the line because you didn’t manage your student loan debt.

Why Bankruptcy Is No Help

If you ever fantasize about never having to pay back your loans because you think filing for bankruptcy will clear all your debts, stop dreaming. While people do seek bankruptcy protection – as a last resort – when their amount of debt outweighs their ability to pay it back and can see a reduction in the amount they owe after negotiating with their creditors, this does not work with student loans. All student loans, even private student loans, cannot be discharged in bankruptcy. Private loans used to be able to get discharged, but Congress changed the law in 2005.

So what happens to your student loans if you declare bankruptcy? Nothing. They stay there, and you still have to pay them. They may go in default, but you will still have to pay the interest that accrues, whether you pay your monthly payments on time or not.

The only way to get out of paying student loans in the United States is to die (even then, depending on the type of loan, your co-signer or spouse may have to pick up your tab).

Deferment and Forbearance

Fortunately, there is another way to get some relief from student loans if your financial life collapses: Deferment and forbearance are two ways that lenders will allow you to postpone paying your student loan payments until you get back on your feet.

With public student loans, you simply need to fill out a form online. If you qualify, you can postpone your payments for a few months. You can qualify if you are unemployed and looking for work, if you are studying at least half-time at a college (or full-time in grad school), or if you meet the U.S. government’s standards for “economic hardship.” In special situations, you can request a postponement of monthly student loan payments even if you don’t qualify under the normal terms.

With private loans, deferment and forbearance is a little harder to get. Private student loan providers can defer loans at their discretion, so you will need to contact your lender and provide documentation and a good reason for why you want to defer your payments. Lenders will work with you, but be prepared to answer a lot of hard questions and have the documents to back up your request.

Income-Based Repayment Plans (IBR)

Students who are employed but earn less than $65,000 per year may qualify for a new government program called “income-based repayment,” which offers a sliding scale of monthly payments that are calculated according to your family size and annual income. You can use this calculator to see what your monthly payments will be.

IBR payment plans can help you if you are in a low-income household, but you will still have to make payments on your loans and enrolling in an IBR plan may mean it will take you longer to pay off your student loans.

Budgeting and Credit

While it’s good to know the consequences of not repaying your student loans on time – and the solutions for making up for any inability to pay – you’re much better off, of course, meeting your obligations. That’s why should get in the habit of spending wisely and coming up with a spending budget now, so you can be smart about your money – and your bills – when you do graduate. Spend this time building up a strong credit history, and you’ll be setting yourself up to repay your student loans in a fair amount of time.

Today’s guest article comes from Cassy Parker at CreditDonkey.com.

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