Student Loan Forgiveness and Student Loan Repayment Compared

Contrary to what many think, student loan forgiveness is not easily offered. Many advertisements claim student loan forgiveness is possible for all borrowers, but these advertisements are misleading. There are only two real scenarios for loan forgiveness: federal loan forgiveness for public service and forgiveness in a bankruptcy situation.

Federal Student Loan Forgiveness

Federal student loan forgiveness is an option for those students who elect a low-paying public service career. Career is an important word here; you must work in the job for a number of years before you are even eligible for forgiveness. In fact, students must repay at least 120 months of the loan before they qualify. At that point, forgiveness may be an option for those who elect careers in low-paying teaching jobs, the military, the Peace Corps or other public service programs. You must apply for the program. If your loans are forgiven, you will have the entire principal of your loan and all interest payments forgiven.

Loans Discharged in Bankruptcy

It is very rare for student loans to be discharged or forgiven in bankruptcy. Many people think they can simply get out of their debts if they file for bankruptcy protection, but this is simply not true. First, a borrower must qualify for the protection. This means the borrower must literally have no options to repay debts as they are currently scheduled.

In particular, the borrower must qualify for Chapter 7 protections. Under a Chapter 13 bankruptcy, the debts are simply rescheduled by the court to a different payment option. A Chapter 7 filing means assets will be liquidated to repay the loans. Student loans are primary loans; this means they will be among the first repaid by the court. The loans will only be discharged in very rare situations. It is more common for the loans to be settled during the bankruptcy process.

Student Loan Repayment Options

There are many options to repay student loans without creating too much financial burden. Aside from standard monthly repayments, there are extended repayment, income contingent repayment and graduated repayment options. Extended repayment allows you to take up to 30 years to pay off the loans, creating very low monthly payments. Income contingent repayment applies a portion of your income to the debt; this means you are not responsible to pay if you are unemployed. Graduated repayment allows for low payments in the beginning and higher payments later. These flexible options make most loans affordable regardless of your income level.

Forbearance and Deferment

If you cannot pay your loans and do not qualify for forgiveness, consider forbearance or deferment. Forbearance is the process of stopping enforcement on a loan while you bring the payments current. You will owe payments during the forbearance period, but the lender will not move your loan into default for a given period of time.

Deferment gives you the chance to put off payments due to a current hardship. You will have to pay interest for the additional months, but you can gain a little flexibility through this option to prevent default.

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