Can I modify my student loans?

11696993404_4fc1391647_mStudent loans are all over the news. Student loan debt has risen to over $1 trillion and it just keeps growing. The average student borrower has an outstanding balance of almost $30,000. Students are graduating into a difficult economy and finding themselves unemployed or underemployed and struggling to make their student loan payments. Is there anything you can do when a student loan payment becomes too much to handle?

Federal Loans

The answer depends in part on the type of student loan you took out. Over 90% of student loans come through the federal government. Those are the loans you qualified for by filling out the FAFSA. You don’t have to start repayment until you graduate, and sometimes you can delay it further. Federal student loans charge a fixed interest rate of 4.66%-7.21% for loans disbursed between July 2014 and July 2015. Federally-backed student loans are carefully regulated and offer a wide variety of repayment options.

Federal student loan repayment options include:

  • Standard repayment: pay a fixed amount every month
  • Graduated repayment: pay a small amount when you graduate and payments will increase over time
  • Extended repayment: pay over a longer period of timing, meaning each payment will be smaller

There are also several repayment programs that allow you to vary the size of your payments based on your income. These include income-based repayment, pay-as-you-earn, income-contingent repayment, and income-sensitive repayment. In general, these plans require comparison of your income with 150% of the federal poverty level to find your “discretionary income.” Your payments will be a fraction of that discretionary income. Each program has slightly different eligibility requirements, but almost everyone qualifies for at least one repayment plan other than standard repayment.

Federal student loans may also be consolidated to simplify payments. Certain restrictions apply to what types of loans you can consolidate and how you can pay a consolidated loan. Generally, you must have at least one Direct Loan or FFEL loan that is either in repayment or in the grace period to qualify and you must repay your consolidated loan through income-based repayment, pay-as-you-earn, or income-contingent repayment.

Finally, the federal government offers several programs through which you can earn forgiveness for all or part of your loan. Typically, these programs require that you work in public service for a certain number of years, after which your student loans are forgiven.

If you don’t make your federal student loan payments, the government can file suit and get a judgment against you. Then it can get a court order to garnish your wages, withhold your income tax refund, or levy your bank accounts as payment.

Private Loans

Though private loans make up just 8% of the student loan market, they’re often the focus of reform efforts and general criticism. That’s partly because it’s much harder to deal with a private student loan. Private student loans may carry interest rates as high as 18% and rates are typically variable, meaning you may end up with much higher payments than you expected if interest rates rise. Private loans often require a cosigner, meaning parents may find themselves on the hook for the cost of college if the student has trouble finding a job.

Private lenders have similar options for collection as the federal government. They may pass the bill along to debt collectors. They may sue for collection and get a court order for garnishment or bank levies.

While the federal government offers many options for repayment, private lenders don’t have to provide any recourse for struggling borrowers. For many students, the only option is to try to negotiate with the lender to modify the terms of the loan. Lenders are never obligated to modify the loan, but some may be willing to adjust the terms under certain circumstances. Part of the problem is that student loans are often commoditized, meaning they are bundled together and sold off as investments. That can make it very difficult for banks to legally modify the terms of any individual loan.

Two Private Lenders Buck the Trend

Recently, two private lenders have made the bold decision to offer some help to their struggling student borrowers. Wells Fargo, which holds about $12 billion in private student loans, and Discover, which holds about $8 billion in private student loans, have separately announced programs to make repayment easier for some student loan debtors.

Wells Fargo will drop interest rates to as low as just 1% for borrowers who are up to 4 months behind on payments. Borrowers who are at immediate risk of falling behind due to extenuating circumstances such as job loss or serious illness will also be eligible for the interest rate reduction. In order to qualify, both the student borrower and her cosigner, if any, must show that they are suffering from financial hardship. That program is available starting this month.

Discover will start to allow borrowers who are no more than 2 months behind to make interest-only payments (of at least $50) for a period of time. The company is planning to roll out more repayment programs next year.

What to Do

If you’re struggling to make your student loan payments, don’t wait to fall behind. If you have federal loans, contact the Federal Student Aid office for more information about modifying your loans. If you have private loans, reach out to your lender and ask about loan modification options. With Wells Fargo and Discover, the tide seems to be turning in favor of student borrowers. Other lenders may soon follow suit and start to offer loan modification programs. In any case, don’t wait for the lenders to come to you. Be proactive about your loan. The sooner you start working on your options, the better.

Many people are struggling with student loans on top of a pile of other debts. If your debt is becoming too much for you to handle, take advantage of a free consultation with one of our experienced local bankruptcy attorneys. A consultation doesn’t mean you’re planning to file bankruptcy. It means you’ll go over your financial situation and your attorney will help you find a debt solution that’s right for you.


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About Russ Cope

Russ B. Cope is dedicated to legal standards that go far beyond filing cases — he is interested in your goals. Russ wants to be certain that each client is making an informed decision that will make their life better, and thrives on the interaction between lawyer and client.