11 Steps to Relief From Federal Student Loans

Students and parents can negotiate lower debts, smaller payments, or temporary reprieves

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 Falling behind on federal student or parent loan payments can be terrifying. Your credit scores drop, which can cut off opportunities to buy homes, go back to school, or  get credit cards. Bankruptcy judges generally won't clear the debt, and the government can take part of your paychecks and even Social Security checks. But those having trouble making payments on federal education loans do have a growing number of attractive options to temporarily reduce or pause their monthly bills, or even get some of their debt forgiven.

 Here are 11 steps to get at least temporary financial relief while preserving good credit ratings:

 1. Document. Gather and keep good records of all phone calls and save copies of all paperwork and E-mails.

 2. Determine your loan type. Look at your documents and, if necessary, call your lender to figure out what kind of educational loans you are having trouble with. This can be harder than it sounds. Through July 1, 2010, private lenders such as Sallie Mae and Citibank can make both federal and private student loans. (After that, students and parents will apply through their college directly to the federal government for federal student loans. Private companies will only make private student loans.) The confusion over the different kinds of loans offered by private companies could have caused some borrowers to mistakenly takeout private loans instead of federal loans. Unfortunately, private loans offer those in financial trouble fewer options for relief. (However, Congress is debating a proposal to allow debtors to use bankruptcy to escape at least some private educational loans.) The following instructions apply only to the five major kinds of federal education loans: Parent Plus, Grad Plus, unsubsidized Stafford, subsidized Stafford, and Perkins.

 [Read about other advantages of federal student loans.]

 3. Determine who to call. You can get the name and contact information for your loan servicer by checking with the federal government or calling 1-800-4-FED-AID. Don't just call the company or school that gave you your loan. Most lenders sell their loans to investors, and hire companies called "servicers" to handle billing. If you've missed several payments, the servicer may turn your account over to a collections agency. In addition, those who have missed some payments often get calls from insurance companies, called guarantors, that backs many student loans. Borrowers generally need only deal with their servicer or collection agency.

4. Check the timing. People who haven't yet missed any payments have the easiest time of decreasing their monthly payments or getting permission to skip some payments, as costs and hassles rise the longer borrowers avoid paying. Lenders can add late fees of up to 6 percent of each monthly bill for every missed payment. It's still comparatively easy to get relief if you start negotiations before you've missed your ninth payment (or are less than 270 days late). After that, however, you're considered in default which means your credit rating plunges and you cannot receive any additional federal financial aid for college. Collection agencies can confiscate tax refunds or other government payments owed to defaulters, and they can garnish up to 15 percent of defaulters' wages. Lenders can add collection fees of up to 25 percent on most federal education debts starting 60 days after default. Those who default on Perkins loans can see their debts jump by collection fees of up to 40 percent.

 5. Know what you want. If you could keep current with smaller monthly payments, check out the various payment plans, including "graduated repayment," which gives low monthly payments for a few years then gradually ratchets up, or the new "income-based repayment," which caps payments below 15 percent of your income. After 25 years of income-based payments, any remaining debt is forgiven. If you're having money trouble because you're a low-paid public servant, make plans to consolidate your loan directly with the federal government and sign up for IBR. After 10 years of payments, the government will forgive the rest of your debt—but only if you have signed up with IBR directly with the federal government.

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