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The Ultimate Guide to Student Loans

Gerri Detweiler

The figure is staggering: Americans owe $1.1 trillion in student loan debt, which is second only to mortgages in terms of household debt. The Consumer Financial Protection Bureau recently released a report detailing the hardships facing some of those borrowers, warning about a “domino effect” on the economy.

The average balance is more than $26,000 for someone with student debt, and one in eight borrowers owe more than $50,000, according to the CFPB. And some debtors are struggling to repay huge debts, such as the person who told us about his struggle to pay back more than $150,000 in student loans despite a good job.

Student Loans & Credit

Student loans generally help your credit scores, as long as you pay them on time. That’s generally true, even if you owe fairly large balances. Surprisingly, even loans in deferment, forebearance or being paid through IBR are generally not reported negatively or considered negative by most credit scoring models. A few borrowers who never missed a payment have complained, however, that the way they are reported (with multiple accounts listed for the same loan) caused their credit scores to drop.

Of course if you are late on payments on one of these loans, your credit scores will suffer. And parents, grandparents or others will also likely find their credit scores hurt if the student they co-signed for pays late or defaults, or if they find they can’t keep up with parent loans they took out themselves to finance their children or grandchildren’s educations.

But keep in mind, even when payments are made on time, many lenders look at debt ratios in addition to credit scores. In other words, they want to know if the borrower can handle the payments on the new loan in addition to their current debts. From that perspective, school loans can keep young people (and plenty of older ones, too), from buying a car or even from buying a home.

Good Debt? It’s Still Debt

Even though these loans are generally considered “good debt” because they can help those with a degree to increase their earning power, a significant portion of those who took them out don’t graduate, find themselves with more debt than they can manage, or aren’t able to find jobs that allow them to repay their loans. As a result, student loan defaults are skyrocketing.

Once in default, borrowers may find themselves dealing with aggressive debt collectors or collection tactics. They may even be sued for a student loan in default. Older borrowers who are near or in retirement are may have part of their Social Security checks seized to help pay back defaulted federal loans. And just as disturbing, members of our military are reporting serious student debt problems.

Borrowers of all ages who can’t keep up may find themselves needing a crash course in how to deal with collection agencies.

For those who become disabled and cannot work, new rules will make it easier for them to discharge their debt due to disability. That’s the good news. The bad news is that a discharge will likely trigger a 1099-C for the canceled debt. That means the amount forgiven is reported as income, and unless the borrower qualifies for the insolvency exclusion, they may find they have a new debt — this time to the IRS. At a minimum, the confusion over the paperwork required to claim this exclusion may require the help of a tax professional and cause considerable stress.

It’s extremely difficult to discharge student debt in bankruptcy, though that doesn’t mean that at least a few people might try to find loopholes they can use to get around that roadblock.

How to Dig Out of Student Loan Debt

Digging out from under student loan debt can feel as daunting as facing that first year of college. Just trying to figure out how much you owe — and to whom you owe it — can be tough, both for some recent graduates, as well as those who have tried to ignore their debt for a while. The federal National Student Loan Data System (NSLDS) is a good place to start, as most federal loans will be included in that database. Try to get a handle on the big picture so you can develop a game plan for tackling your debt.

One of your first tasks should be to find out whether you qualify for loan forgiveness programs. Those programs are limited, but if you do qualify, you may get some or all of your debt forgiven, and unlike the disability discharge, you may not have to pay taxes on the forgiven amount, depending on the program.

Are you able to make your payments on time each month? Then look for ways to pay off your loans faster.

If, on the other hand, you are having trouble keeping up with your payments, then you’ll first want to know your rights, which include the right to counseling, information from the loan servicer, deferment and reduced payments. Forbearance or deferment may help you temporarily reduce or suspend your payments, but for a longer term solution, check out IBR. The Income-Based Repayment and Pay As You Earn programs allow those with federal student loans to reduce their payments based on their income, if they qualify. Payments can go as low as $0 a month for someone who is not working. Balances are forgiven after 10, 20, or 25 years in the program. (The length of time varies by program and depending on whether or not employment is considered public service.)

If you have already defaulted on federal loans you may even be able to use IBR to get out of default. There are fewer options for getting out of default with private loans, however. Another good resource for understanding your rights and options is StudentLoanBorrowerAssistance.org.

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