What Can You Do if Student Debt Is Too Large?

Student debt can be reduced through loan modification. Loan modification is a broad term used to describe any number of debt reduction strategies including refinancing, consolidating or settling debt. Regardless of whether your debts are federal or private, in good standing or past due, there are always options to modify the loans if your debt is too large.

Student Debt Refinancing

Refinancing is a change in the terms of your existing loan. If you initially took a standard repayment loan, for example, at a monthly payment of $500 a month but can no longer afford this, you can refinance. You can elect an extended repayment loan, which will have a higher interest rate but lower monthly payments, to keep your loan in good standing. Refinancing typically involves negotiation directly with the lender, but a third party may be used.

Student Debt Consolidation

Consolidation is paying off multiple loans with one, new, large debt. You can then repay this new debt according to more favorable terms, such as a lower monthly payment or lower interest rates. You can consolidate federal student loans with the US Department of Education for no penalty. You can even consolidate tuition loans on private student debt with other expenses, such as credit card debt while attending school, to reduce your debt burden. 

Student Debt Settlement

Settling your debt with a lump sum payment may be an option. You can reduce your total debt burden by agreeing to pay a big chunk up front and having the remaining debt excused. Most borrowers will take a new loan in order to do this, but some will have cash due to an inheritance, bonus or other sudden liquidity. Settlement typically comes with a credit penalty and may be difficult to achieve if you would be able to pay off the loan based on your income.

Student Debt Forgiveness

Forgiveness of federal student debts is possible in some rare scenarios. Forgiveness occurs immediately if the borrower passes away or becomes permanently disabled. Otherwise, forgiveness is extended to some students who elect careers in public service. Teachers, military service people or members of the peace corps may be eligible. This only occurs if the borrower first made at least a minimum number of loan payments, typically about six years worth. If you qualify, however, your entire debt sum including interest and principal can be totally eliminated through the forgiveness program.

Student Debt Discharge

Some borrowers think it is easy to get student debts discharged in a bankruptcy situation. Actually, it is rare to receive a full discharge of the debts. A court will have to determine three specific items are applicable in your situation if you wish to have the debts discharged. First, you must have made an honest effort to repay the loans while they were active. Second, you must have experienced a sudden financial emergency that will prevent you from living a reasonable lifestyle and repaying your debts. Finally, you must be able to show this emergency will extend for an unforeseen period of time. Only if all of these items exist will your debts be excused in court.


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