How to avoid defaulting on your student loans
— -- Thousands of young adults who graduated from college in May are staring into the abyss. They don't have jobs — or the jobs they have pay barely enough to keep the lights on — and their student loans are about to come due.
The Department of Education and most private lenders give college graduates a six-month grace period before they're required to start making payments on their student loans. Usually, that gives graduates enough time to find a job, but these days, jobs are scarce, and good jobs are even harder to find.
Some 8.8% of borrowers whose first payments came due between Oct. 1, 2008, and Sept. 30, 2009, defaulted on their loans, according to a recent report from the Department of Education. For every student loan borrower who defaults, two others are delinquent, according to a study by the Institute for Higher Education Policy.
While defaulting on any loan will trigger a lot of unpleasant consequences, defaulting on your federal student loan debt could be disastrous. Your wages may be garnished and your tax refunds withheld. Your credit score will be ruined, which will make it more difficult to borrow for a house or a car.
Fortunately, if you have federal student loans, you have options.
Reducing your payments
The standard repayment term for a federal student loan is 10 years, but the government offers several alternatives that will lower your payments:
•Extended repayment. This will extend repayment of your federal student loans for up to 25 years. To qualify, you must have at least $30,000 in federal student loans exclusively with the federal Direct Loan program or a Federal Family Education Loan Program lender.
•Graduated repayment. You pay only the interest on your loan for up to four years. After that, your payments will gradually increase so that you pay the loan off in 10 years. Your total interest may be more than you'd pay with a standard repayment, but it will be much less than the interest on an extended repayment loan.
•Income-based repayment. This program, launched in 2009, permits you to apply for a reduction in your loan payments based on your discretionary income. In most instances, that means payments won't exceed 10% of your total income. After 25 years of qualifying payments, the balance of your loan will be forgiven.
The program is particularly beneficial for borrowers "who have chosen a profession that's a bad match for the amount of education debt they have taken on," says Michael Ryan, vice president of American Student Assistance, a non-profit company that helps borrowers manage their loans.
Despite these benefits, the program is underused, says Lauren Asher, president of the Institute for College Access and Success. As of April, about 350,000 borrowers had signed up, she says. In light of the rise in loan defaults, she says, "We know that there are many more people who are eligible for the program and might benefit from it."
Postponing payments
For graduates who are out of work,, a lower-than-expected salary my seem like a nice problem to have. Even for the unemployed, though, default is avoidable. Two options for borrowers experiencing temporary hardship:
