Student loan debts vary in terms of repayment plans. For the purposes of this article, we’ll discuss the more common federal student loans, how you can handle repayment, and what happens if you cannot pay or file for bankruptcy.
Kinds of Federal Loans
The two kinds of federal loans are FFEL(Federal Family Education Loans) and Federal Direct Loans. FFEL loans are made by private lenders and guaranteed by the government. In this case, if you default or file bankruptcy, the lender is reimbursed by the government. “Federal Direct Loans” pretty much speak itself: they are direct loans from the U.S. government.
There are also school federal loans, where the school issues a federal student loan. Repayment plans depend on the school. Lastly, there are private loans, which are made with federal funds and come with the least options for repayment. You typically need to discuss with the lender repayment options, along with what happens if you default or file bankruptcy.
If You Think You’ll Default on the Debts
If you do default, it’s best to find out in advance. For repayment plans, you don’t want to wait until you’re far behind on payments, as many of the following options will not be available to you. Also, you are not locked into any plan, typically being able to switch your plan once a year.
Repayment Plan Forms
Standard repayment plans are offered by your lender, where you make payments for up to 10 years. You pay less interest here, but your monthly payments are higher.
Graduated repayment plans are common too, mainly because you can start small (when you’re in school) and start paying more over time (as you get work).
An extended repayment plan allows you to pay smaller amounts for up to 25 years. You need to have a balance of more than $30,000.
Last, income-based repayment plans are unique in that, as it sounds, you can pay based on how much money you are making. If you had a job but lost it, the income would go down, and therefore the monthly payments would go down.
Default and Bankruptcy
If you think you’ll fall behind in payments and might default, it’s best to act early. If you fall far behind, the government can take money from your income tax return, garnish your wages, or even take back federal benefits (if you’re on social security, for example).
The best move is to hire professional counsel if you fall far behind and cannot catch up. In most cases, you cannot file Chapter 7 bankruptcy and get your student loans discharged. This is where a professional bankruptcy attorney can help you.