Consolidation, deferment, forbearance and forgiveness: Confronting student loan debt – Part 5

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This article is the fifth and final edition about confronting student loan debt. The first four articles discussed identifying what type of student loans you might have, locating who is servicing your loan, understanding the terms of your loan and options available to repay your student loan. This article will focus on consolidation, deferment, forbearance and forgiveness of student loans.

Consolidations of student loans are one of the most popular options for managing repayment of student loans. This option streamlines repayment by replacing multiple loans with a single loan. Student loan borrowers are eligible to consolidate their loans generally after they graduate, leave school or drop below half time enrollment. Consolidation also provides access to other repayment plans that may reduce the monthly payment by stretching out the loan term. This option can also increase the total cost of the loan which generally means the borrower will not save money by selecting this options but simply make the repayment more manageable. It is recommended that student loan borrowers review each of the federal loans they have to make sure they are utilizing the best repayment option before consolidating their student loans.

A PLUS loan made to a parent of a dependent student cannot be transferred to the student through consolidation. Therefore, a student who is applying for consolidation cannot include the PLUS loan their parents may have taken out for education.

For a complete list of the federal student loans eligible for consolidation, contact the Direct Loan Consolidation Center by calling 800-557-7392 or go to www.loanconsolidation.ed.gov.

Private loan consolidation is more complicated. Some private loans can’t be consolidated. If the private student loan is already in default, the borrower is required to meet certain requirements before they can consolidate the loan. Typically the new loan, if allowed, has a variable interest rate and is based on the borrower’s current credit scores. If the private student loan has a cosigner, often consolidation will remove the cosigner from the loan.

Under certain circumstances, the borrower can receive a deferment or forbearance that allows them to temporarily postpone or reduces their federal student loan payments. Postponing or reducing the payments may help the borrower avoid default on the loan. The borrower will need to work with the loan servicer to apply for deferment or forbearance. It is important that the borrower continue to make payments on their loan until the deferment or forbearance is in place.

During deferment the borrower will need to make interest payments on their loan. On the Federal Perkins Loan, Direct Subsidized Loans and Subsidized Federal Stafford Loans, the government may pay the interest. The borrower is responsible for paying interest on all unsubsidized and PLUS loans. If the interest is not paid during deferment, it may capitalize and the account balance will grow. There is a three-year limit on economic hardship deferments and a five-year limit on forbearances. Temporary suspension of loan payments is a great option for short-term financial difficulties.

Student loans must be paid even if the borrower does not complete their education, can’t find a job or is unhappy with the education they received. However, certain circumstances might lead to the student loan being forgiven, cancelled or discharged. Forgiveness, cancellation and discharge of a student loan means that the borrower is no longer expected to repay the loan.

In 2007, congress created the Public Service Loan Forgiveness Program to encourage individuals to enter and continue to work full time in public service jobs. The borrower must make 120 payments on their student loans. If they have fulfilled their obligation working in an approved public service job, their balanced owed will be forgiven. Only direct loans are eligible.

Cancellation of student loans is very difficult to receive and only applies to federally funded student loans. The following are events that may make loan cancellation an option:

  • Closed school discharge: If the college closes while the borrower was in attendance or up to 90 days after withdrawal.
  • Unpaid refunds: If a borrower withdrew and the college owed a refund but never returned the funds to lender.
  • False certification discharge: If the college improperly certified the borrower’s ability to benefit from a higher education or the borrower is a victim of identity theft.
  • Death discharge: If the borrower (or student for whom a parent borrowed a Parent PLUS loan) dies.

Total and permanent disability discharge: If a doctor certifies that the borrower is totally and permanently disabled, or if a veteran is unemployed due to a service-connected condition they may be eligible for this discharge.

Michigan State University Extension has additional information on managing student loans as well as basic financial management tips at MI Money Health.

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