As Student Loan Grace Period Ends, Consider Options to Avoid Default

If you are worried about defaulting on your loans, here are several routes to pursue.

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It's October and time for the Fall Classic (though without my beloved New York Yankees). For many recent graduates, it's also a far less exciting season: time to start repaying student loans.

That's right, your fleeting six-month grace period is almost finished. You aren't able to see us, but at the Student Loan Ranger, we are making a sad face for you. We've also compiled some tips for entering repayment and what to do if you aren't able to shoulder the financial burden just yet.

Now is the time to grab the bull by the horns and figure out exactly what you're facing. Make a list of all your student loans. Federal loans are in the National Student Loan Data System and private loans will show up on your credit report. By law, you are entitled to a free copy of your credit report once a year. Make sure your loan servicers have your current information and keep them informed of any name or address changes. Payments are still due even if you don't receive an invoice!

The Department of Education has different repayment plans available for federal loans. Options vary for private loans, so ask your lender. Determine what you'll pay under different plans. These calculators can help; compare the short- and long-term effects of different plans and determine what's right for you.

[Learn about seven tips for repaying student loans.]

If you cannot afford to make payments on your loans, talk to your servicer now. Do not miss your payments! If you are behind on payments, you are delinquent on your loans. If you are delinquent for too long, you will go into default. For federal loans, default is usually declared after nine months of delinquency, but for private loans you could be in default as soon as you miss a payment.

If you default on your federal loans, the government can seize tax refunds, garnish your wages, and take a portion of Social Security payments—all without a court order. You may lose your professional license, and you will lose eligibility for new loans and grants. Private lenders' collection powers are not as strong, but this is still debt you owe. If you default on either your private or federal loans, it affects your credit and could prevent you from securing a credit card, mortgage, apartment, or job.

You may be able to postpone repayment on your federal loans through deferment or forbearance, but you will lose these rights if you default first, so be proactive about your situation.

[See how to repay student loans based on your income.]

Deferments are temporary suspensions of payments that are available if you reenroll in school, are unemployed, or face economic hardship. Deferments also are available in instances of disability, certain military service, and for a period following active military duty.

Forbearances are temporary postponements or reductions of payments because of financial hardship. You may be able to receive forbearance if you're not eligible for deferment. The main distinction is that interest does not accrue on subsidized Stafford loans or Perkins loans (but will on any unsubsidized loans) during periods of deferment, but accrues on all your loans during forbearance.

[Read more about Stafford and Perkins loans.]

There are no standard entitlements on private loans, but you still need to call your servicer. You may be able to negotiate a short-term forbearance or lower your payment amount. Ignoring the problem will not help; you do not want to default.

Before you seek deferment or forbearance, however, figure out which repayment plans are available. If you can afford it, making some payments is better than making none.

Federal loans have options that may reduce your monthly payment amounts and make them affordable. Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) can lower your payments. IBR generally will be better for most people, but do some calculations to make sure. These plans also extend your repayment period and will increase the total amount you will pay since you'll accrue (and pay) interest over a longer period.

If you are entering or considering a public service position, consider IBR or ICR, because they are qualifying repayment plans for Public Service Loan Forgiveness (PSLF) and can help make payments affordable while working toward forgiveness. To learn more about how IBR and PSLF work, register for our free October 14 webinar, "Drowning in Debt? Learn How Government and Nonprofit Workers Can Earn Public Service Loan Forgiveness."

Consolidating your loans also may help, because you'll only have one payment on those loans. Avoid consolidating federal loans and private loans though, because you will lose the federal protections and repayment options. Your interest rate also may change, so check to see if you actually are getting a better deal with consolidation.

[Here are four reasons to consolidate your student loans.]

Finally, consider switching plans if you find your payments are too expensive. Changing to an extended repayment plan or an income-based plan like IBR or ICR may help decrease your payments. You can always switch back or make additional payments if your income increases. (There is no prepayment penalty on federal loans, but double-check the terms of your private loans.)

Visit the Educational Debt Relief section of our website and register for a free informational webinar to learn more. Follow us on Facebook and Twitter to stay up to date on educational debt relief. We post weekly tips and updates under the hash tag #studentdebthelp.

Repaying loans is not fun, but it must be done. If you're having difficulties making payments, be proactive about your situation and seek out options that can help. Unfortunately, your debt probably is not going to magically disappear, though we at the Student Loan Ranger would make a happy face if it did.

Radhika Singh Miller is a program manager for educational debt relief and outreach at Equal Justice Works. In 2008, she served on the student loans team in the negotiated rulemaking for the College Cost Reduction and Access Act (CCRAA) and has extensive knowledge of this landmark legislation. She conducts educational webinars and presentations, advises schools and organizations, and advocates for legislation and policy. Prior to joining Equal Justice Works, Miller was a staff attorney at the Partnership for Civil Justice in Washington. She received her J.D. from Loyola Law School Los Angeles.