case western reserve university



"You and the Law"

If You Can't Make Student Loan Payments

By Armond Budish
From The Cleveland Plain Dealer
Sunday, August 2, 1997
(Reprinted with the author's permission.)

You have completed college and now it's time to pay the piper, or at least uncle Sam. Your federal student loans that made it possible to attend school must now be repaid.

What happens if you run into problems making payments? If you stop paying and default, you are asking for trouble. Congress has passed laws requiring vigorous collection efforts, including garnisheeing wages, taking income tax funds and even filing law suits. The government's costs in trying to collect from you will be charged to you. And your credit rating will be damaged.

Thankfully, Uncle Sam has also provides a number of opportunities to avoid default or to get out of default. By understanding your financial aid repayment rights, you may be able to salvage your credit record by reducing, postponing or even canceling your loan payments.

Q- What can I do if I can't repay my student loans?
A- When you accepted your loan money, you entered into a binding contract. You agreed to repay the loan, and you can't simply ignore that obligation.

But in a few situations the government may allow you to postpone the payments or may cancel the loan. Here are the most common reasons for postponement or cancellation:

  • You died or suffered a disability that makes you unable to work or attend school for at least 60 days.
  • You are unemployed but making good-faith efforts to find work.
  • You are in dire financial straits and can't make the payments.
  • You are a single working parent.
  • You have returned to school.
  • You are serving in the military.
  • You are performing community service, such as serving in the Peace Corps or assisting the homeless.
  • You attended a trade school that closed before the end of the program.

Q- How can I postpone or get my loan payments canceled?
A- Call the loan holder or the U.S. Department of Education at 1-800-621-3115 for information and to find out if you qualify. You cannot have your payments postponed if you have defaulted on your loan.

Q. What can I do if I have defaulted?
A. Congress created a plan in 1992 that may allow you to make "reasonable and affordable" payments, which may be as small as a few dollars per month.

There is no explicit formula for reasonable and affordable payments. You must contact the holder of your loan and provide detailed information about your income and expenses. If your expenses for essentials leave you with little income, you may get your payments reduced.

Once the government sets a "reasonable and affordable" payments schedule, you must make the payments. After 12 consecutive payments, you will be considered out of default and will be eligible for postponement of further payments if you qualify.

Once you are out of default, the guarantee agency or Department of Education can sell your loan to a loan service company and your reduced payments will end. You will be put on a regular payment plan, with payments probably scheduled over 10 years until the loan is paid off. When you are placed on a regular payment plan, your monthly payments are likely to be well above the amounts set under the "reasonable and affordable" schedule. If you can't afford to meet your new payment schedule, ask for an alternative plan.

Options include reducing the monthly amounts but extending I your payments over 30 years; lowering payments for a few, years while your income is lower and increasing payments in future years as your income (hopefully) rises; or basing your payments directly on the amount. of your income.

Budish is a partner in the law firm of Budish & Solomon in Pepper Pike.