5 Tips to avoid student loan default

Student loans have become one of the most common forms of debt.

According to an advocacy group, the Project on Student Debt College, 10% of college students graduated with $40,000 or more in student loan debt for the year 2008.

Default on student loans is on the rise and bankruptcy is not an option for most graduates with student loans.

A strict standard is applied to federal and private student loans when it comes to getting relief from student loan debt in bankruptcy court. You must be able to demonstrate repayment would cause undue hardship.

Federal student loans are more flexible than privately funded loans in helping borrowers reduce payments or qualify for student loan forgiveness. Here are five tips to avoid student loan default:

(1) Work with your lender
Contact your lender and let them know you are willing to work-out a feasible repayment plan. Some lenders may offer interest-only repayment for a set time period or other repayment plans that will lower your payment for a set time period until you are able to resume regular payments.

(2) Request Forbearance
Forbearance temporarily reduces or postpones repayment for a period of time. Interest continues to accrue while the loan is in forbearance. Forbearance can be granted in intervals of up to 12 months at a time for up to 3 years.

(3) Request a Deferment
Unlike forbearance, a deferment is a temporary suspension of repayment under specific conditions such as re-enrollment in school (at least part-time), unemployment, economic hardship or active duty in the military.

During deferment you do not have to pay interest on the loan if it is a subsidized Direct FFEL, Stafford Loan or Federal Perkins Loan. If your loan is unsubsidized you may be responsible for the interest while under a deferment. Federal loan repayments can be deferred for up to 3 years.

(4) Extend your federal student loan
Request an extended repayment plan where monthly payments can be stretched as much as 25 years. Extending your repayment comes at a higher cost in the long run but in the short term your monthly payments will be lower. Depending on the amount owed, federal loans can be consolidated and extended from 12 to 30 years. For more information see http://www.loanconsolidation.ed.gov/.

(5) Cancellation of debt
Public workers such as police officers, public defenders or teachers may qualify for cancellation of any remaining debt after 120 payments have been made on or after October 1, 2007. This deal is only offered if your loans are with the Federal Direct Loan program even though you may qualify if you consolidate private student loans into the Direct Loan program. The amount of debt that is cancelled is tax free.