A frequent question we get on GetOutOfDebt.org has to do with student loans. Quite frankly many of them are a financial death sentence and a trap.
Student loans are one of the worst debts you can owe. I’m not even sure owing a loan shark is worse based on many of the stories I’ve read from readers.
If you owe private student loans, you have my condolences. There is little you can do to minimize the damage of those loans unless you are permanently disabled and your loan holder allows for a disability discharge.
Student loan lenders can add massive fees and penalties, add fees to collect on the debt, and administratively garnish your wages without going to court. Nothing good ever really happens when it comes to private student loans.
Seems pretty bleak then, right?
Wrong.
If you owe money on any federal or government backed student loans there is a lot of great help and options available to consolidate your loans and lower your payments.
The first step should be to consider your overall financial situation and if you have other debt which is preventing you from making your student loan payments, you should consider bankruptcy as a way to push that debt out of the way so you can focus on the higher priority student loan debt.
You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you.
Next, look at the Federal Direct Consolidation Loan program to consolidate your student loans and wrap them into one loan for a longer period of time. This will lower your monthly payment but since you’ll be making the payment over a longer period of time, overall you will pay more. If you lower the payment or interest but pay out over a longer period of time, the math just works out that way.
But if making through the month or adding more money to your pocket each month is necessary then consolidating your student loans is going to help.
Different repayment plans are available once you consolidate your eligible student loans. These include:
- Standard Repayment Plan
You will pay a fixed amount each month until your loan(s) are paid in full. Your monthly payments will be at least $50 for up to 10 to 30 years, based on your total education indebtedness.
- Graduated Repayment Plan
Your minimum payment amount will be at least equal to the amount of interest accrued monthly. Your payments start out low, and then increase every two years for up to 10 to 30 years, based on your total education indebtedness
- Extended Repayment Plan
To be eligible, your Direct Loan balance must be greater than $30,000 and you will have up to 25 years to repay your loan(s). You have two payment options:
- Fixed Monthly Payment Option -You will pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50.
- Graduated Monthly Payment Option – Your minimum payment amount will be at least $50 or the amount of interest accrued monthly, whichever is greater. Your payments start out low, and then increase every two years.
- Income Contingent Repayment Plan
Your monthly payments will be based on annual income, Direct Loan balance and family size, and are spread over a term of up to 25 years.
- Income Based Repayment Plan
Your monthly payments will be based on annual income and family size, and spread over a term of up to 25 years. You must be experiencing a partial financial hardship to initially select this plan and once you select this plan you cannot change to any other plan except the Standard Plan.
This program is awesome in reducing monthly payments to extremely low levels if you qualify for it.
While you consolidate your loan(s), you have a new repayment plan option called the Income-Based Repayment (IBR) Plan. The IBR Plan bases your monthly payment on your yearly income and you must have a partial financial hardship to enroll. This plan is an alternative to the Income Contingent Repayment (ICR) Plan and is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by capping the monthly payments at 15 percent of your discretionary income (the difference between your Adjusted Gross Income and 150% of the poverty guideline for your family size and state of residence). If you are married and file taxes jointly, both your and your spouse’s income will be considered when calculating your IBR payment amount. If you are married AND file taxes separately, only your income will be considered when calculating your IBR payment amount. Like ICR, after 25 years of qualifying repayment, any remaining balance on the loan will be forgiven, but you may have to pay taxes on the amount forgiven.
To participate in the IBR Plan, you must authorize the U.S. Internal Revenue Service (IRS) to inform the U.S. Department of Education (the Department) of the amount of your income.
The following student loans are eligible for consolidation under the Federal Direct Consolidation Loan program:
Eligible Loans
The following federal education loans are eligible for consolidation into a Direct Consolidation Loan:
Subsidized Loans:
- Subsidized Federal Stafford Loans
- Direct Subsidized Loans
- Subsidized Federal Consolidation Loans
- Direct Subsidized Consolidation Loans
- Federal Insured Student Loans (FISL)
- Guaranteed Student Loans (GSL)
Unsubsidized Loans:
- Unsubsidized and Nonsubsidized Federal Stafford Loans
- Direct Unsubsidized Loans, including Direct Unsubsidized Loans (TEACH) (converted from TEACH Grants)
- Unsubsidized Federal Consolidation Loans
- Direct Unsubsidized Consolidation Loans
- Federal PLUS Loans (for parents or for graduate and professional students)
- Direct PLUS Loans (for parents or for graduate and professional students)
- Direct PLUS Consolidation Loans
- Federal Perkins Loans
- National Direct Student Loans (NDSL)
- National Defense Student Loans (NDSL)
- Federal Supplemental Loans for Students (SLS)
- Parent Loans for Undergraduate Students (PLUS)
- Auxiliary Loans to Assist Students (ALAS)
- Health Professions Student Loans (HPSL)
- Health Education Assistance Loans (HEAL)
- Nursing Student Loans (NSL)
- Loans for Disadvantaged Students (LDS)
Ineligible Loans
Some loans are always ineligible for consolidation. While these loans may not be included in a Direct Consolidation Loan, they may be considered in the calculation of the maximum repayment period under the Graduated or Extended Repayment Plan. These include but are not limited to the following:
- Loans made by a state or private lender and not guaranteed by the federal government
- Primary Care Loans
- Law Access Loans
- Medical Assist Loans
- PLATO Loans
Student Loan Consolidation Application
If you think the Federal Direct Consolidation Loan program might make sense for you then you can apply online here.
What to Do About Private Student Loans
If you want to consolidate your private student loans you can contact your current loan holder and ask them if they are accepting applications to consolidate. Otherwise you can search for a new lender. Opportunities to consolidate private student loans are slim.
Remember, that a student loan can’t typically be discharged in bankruptcy and when you are applying for a private student loan consolidation you are really applying for “a loan.” Exercise the same care and due diligence you would before obligating yourself for the loan. make sure it will be affordable for you now and in the future.
But private student loans can be managed in a chapter 13 bankruptcy and the payments reduced.
Did that help any?
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Thanks for the great summary of the options. I needed the photo for stress relief. It truly is beautiful…. Where is it? If you have any other stress relief photos for private student loan holders (we really need it), please post them & let us know the locations of the photos as well. Thanks.
My student loans are lowering my credit score evennthough I pay every month. What can I do