Bankruptcy Law FAQ

I defaulted on a student loan a long time ago and I just received collection letters. I can't afford very much, but I can pay something. Any suggestions?

I defaulted on a student loan a long time ago and I just received collection letters. I can't afford very much, but I can pay something. Any suggestions?

The Higher Education Act allows you to rehabilitate your student loan by making "reasonable and affordable" payments based on your income and expenses. The holder cannot insist on a monthly minimum. If you make six consecutive monthly payments on time, you will become eligible to apply for new federal student loans or grants if you want to return to school. You must continue to make the monthly payments, however, until you make at least 12 consecutive payments. Then your loans will come out of default. The default notation will come off your credit report, and if you return to school, you can apply for an in-school deferment to postpone your payments.

If you do not return to school, after you make 12 consecutive monthly payments, the holder of your loan will sell it back to a regular loan servicing company. (This is called loan rehabilitation.) Your new loan servicer will put you on a standard ten-year repayment plan, which may cause your monthly payments to increase dramatically. If you can't afford them, you will need to apply for a deferment (if you are eligible) or request a flexible repayment option.

I paid off my student loan a long time ago, but the Department of Education recently wrote me saying I still owe it. Help! What can I do?

You need documentation. First, contact your school and ask for its Department of Education report showing the loan's status. Then, think about ways you can show that you paid the loan: Do you have canceled checks or old bank statements? Can you get microfiche copies of checks from your bank or a government regulatory agency if your bank is out of business? Does an old roommate remember seeing you write a check every month? Can you get old credit reports (check with lenders from whom you've borrowed in years past) which may show a payment status on an old loan? Get old tax returns (from the IRS, if necessary) showing that you itemized the interest deduction on student loan payments back when that was permitted. The last holder of the loan might have a copy of the signed promissory note. Any of these things will help you prove to the Department of Education that you paid your loan.

I'm swamped with student loans and can't afford my payments. What can I do to avoid default?

First, know that you're right to do all you can to avoid default, rather than ignoring your loans and hoping they'll just go away. If you default, the amount you owe will probably skyrocket because the government can add a collections fee of up to 25% of the principal.

To avoid default, contact the companies that service your student loans and tell them why you can't make your payments. You may be eligible for a deferment -- ways of postponing repayment. In very limited circumstances, you may be able to cancel a loan. Also talk to your loan holders about flexible payment options. Many now offer payments geared to borrowers' incomes.

In addition, consider consolidating your student loans. You can consolidate federal student loans through the government's direct lending program or through a private loan servicing company, such as Sallie Mae or USA Group. With loan consolidation, you can lower your monthly payments by extending your repayment period; you may also be able to lower your interest rate. Most loan consolidators offer flexible repayment options based on your income, and you may be able to consolidate even if one or more of your loans is in default. Types of loans eligible for consolidation, repayment options and interest rates vary slightly from lender to lender. Contact loan servicers for more information:

• Federal Direct Consolidation Loan Center: 800-557-7392, http://www.ed.gov/offices/OPE/DirectLoan/consolid.html
  
  
• Sallie Mae: 800-524-9100, http://www.Salliemae.com
  
  
• USA Group: 800-382-4506, http://www.usagroup.com.

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