I Can’t Afford To Repay My Student Loans. What Are My Options?

Q: Hi, I have a pretty unique situation regarding student loan debt. I have about $100K in student loan debt. I did not find a job until about 8 months out of college and the loans were in deferment. The entry level position I obtained was not enough to pay my loans and I was playing catch up from the get go. The loans were then in forbearance and still are as I am not about to make $700 monthly payments. To top it off my co-signer filed for bankruptcy without me knowing and one of the creditors sold the debt and reported it as charged off and my credit is now terrible even though I was not the one who filed for bankruptcy.

Is there anything that I can do legally since I was not the one who filed and my credit is now shot? I feel like $100K will never be paid off. I regret going to college! What do I do?!? PLEASE HELP!

A: With student loan debt topping $1 trillion, you are certainly not alone as you deal with repaying your student loan.

You brought up two separate issues: 1) Inability to pay your student loan, and 2) Your co-signer filing bankruptcy. Each issue should be handled separately.

Inability to pay your student loan

You may have already considered some of these actions. If not, here are some steps to take:

Determine the type of loan. If it’s FSA (Federal Student Loan, backed by Sallie Mae or some government source), then there are very few options to eliminate it. If you have a government loan, contact the representative you used to establish the forbearance to determine your options. The good news is that under President Obama’s new program, as of January 1, 2012, you can now apply for lower payment, especially as in your case, the job you received is paying a lower income than you were expecting. After 20 years, the loan is forgiven if it hasn’t been paid in full.

Consolidate your loans. Under the new program, if you still haven’t consolidated all of your loans, you may be able to consolidate them – both private and federal loans – into a single loan, with a lower interest rate and smaller monthly payments. You will pay even less if you agree to automatic payments. Be sure to apply before July 1, when the Budget Control Act of 2011 is scheduled to eliminate these discounts. If you have not tried a Loan Consolidation, call 800.557.7392 for the Federal Direct Consolidation Loan Center, or go to: http://loanconsolidation.ed.gov/.

Explore IBR (Income-based Repayment) – Again, the rules may have changed under the new program, so go to Income-based Repayment Programs. They will determine what payments you can afford.

Look into Loan Rehabilitation. This program is for students who are in default. If you make payments on time for 9 months over a 10-month period, they will consider the loan “rehabilitated”. This means that once you complete the program, your loans will no longer be considered in default, potential wage garnishments will end, and the IRS will no longer withhold payments from a tax refund. This program will be a lot easier to complete if you do not have any of your wages garnished since the payments you make are in addition to those subtracted from your wages through garnishments. For details, go to: FSA Loan Rehabilitation.

Explore employer programs. Ask your employer if they have any type of loan repayment assistance. In this market, unless you have unique skills, that’s generally not going to be a likely option at this time. However, as you build your skills and value to an employer, this could help you in the future.

Consider Bankruptcy. If your loan was given by a bank, not backed by a FSA (Federal Student Loan), and you have not consolidated it with any type of federal loan, you may want to consider talking with a bankruptcy attorney. The courts are now slightly more open to considering these loans very much like credit card debt, which my be relieved in bankruptcy. Every state has their own rules, so talk to an expert in your area. Note: A FSA cannot be eliminated through bankruptcy.

They key is to not ignore the problem since it could lead to a payroll garnishment. Once a garnishment is in place, it will become very difficult to go into a Rehabilitation program. It’s important to take action now. For more answers to your Student Loan questions, go to: Student Loan Assistance Q & As.

Your co-signer filing bankruptcy

You really have two options:

1)       Talk with the lender to explain the situation. See if they will waive your liability, and remove the record from your credit score.

2)       If the debt was not related to a FSA, then again, you may want to talk with a bankruptcy attorney to explore your options. If your credit score is already very poor, it may be a way to get a fresh start.

We know this is a difficult time, but there are steps you can take to place yourself in a stronger financial position in the future. Don’t hesitate to contact us if you have other questions.

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