Lighten the Burden of Student Loans

Americans have been paying down mortgage debt, home-equity loans, credit card debt and auto loans over the past several years. But student-loan borrowing is up significantly, reports the Federal Reserve Bank of New York. And, says Moody’s Analytics, delinquency rates on student loans haven’t improved. “The long-run outlook for student borrowers remains worrisome,” concludes Moody’s.

That doesn’t surprise me. We at Kiplinger get a steady stream of e-mails on the subject, like this one from Josh: “I am a current college student, and when I graduate I expect that my total debt will be somewhere around $100,000. What solutions do I have for paying this off?”

Others, like Desmond, are at wit’s end: “When it comes time to pay my lender, I just can’t give them what they want. I’m so desperate to get this loan off my shoulders, I scavenge change to try to win $50,000 on a $1 scratch-off. I could really use some pointers.”

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Desmond, save the buck. And don’t buy into a scheme like this one, from Sophie: “I have been told that the best path [to paying off my undergraduate loans] is to go to medical school and go into a high-paying medical career. But I feel that going deeper into debt by paying for med school isn’t a good idea. Then there’s the fact that I just don’t want to be a doctor.” Sophie, go with your gut.

You may be tempted when the bills come due -- as they will this fall for members of the class of 2011 who took out federal student loans -- to ignore them. Don’t. If you don’t pay up, your paycheck could be garnished, your tax refund seized and your credit rating wrecked (see The Dark Side of Student Debt).

There’s no magic wand that will make your loans go away. But there are some things you can do to lighten the burden:

Work for an organization that will help pay off your debt -- for example, the U.S. military, AmeriCorps or Teach for America. Teaching in a low-income school may also qualify you for loan forgiveness, and some occupations forgive loans as a recruiting tool. (For more information, call the federal financial-aid hotline at 800-433-3243, or go to the Department of Education’s student-aid Web site, www.studentaid.ed.gov. For a list of loan-forgiveness programs, go to FinAid.org.)

In addition, police officers, public defenders, public-school teachers and others who work full-time in the public sector qualify for cancellation of any remaining debt after 120 payments made on or after October 1, 2007.

Apply for leniency. If you owe federal Stafford loans, you’re entitled to defer repayment for up to three years if you are unemployed, experience economic hardship or go to grad school (see Digging Out of Student Debt).You could also ask your lender for forbearance; with a federal loan, you may suspend payments for up to three 12-month periods.

Federal loans also give you the flexibility to lower your payments in the first few years or extend your repayment term -- or you may qualify for an income-based repayment plan, which links your payments to your income (see the calculator at IBRinfo.org). If you have any questions about how to manage your federal student loans, contact the Federal Student Aid Ombudsman at 877-557-2575.

If you have private loans, you’re not eligible for federal deferral or forgiveness programs. But if your loans are through Sallie Mae, the giant student-loan company, and you’re struggling to repay them, call the company’s Office of the Customer Advocate, at 888-545-4199, to plead your case. Or send an e-mail to advocate@salliemae.com.

Don’t know who holds your loans? Try the Department of Education’s National Student Loan Data System, a central clearinghouse for information about all federal student loans. Unfortunately, there’s no equivalent database for private loan information. Sallie Mae advises borrowers either to check their loan documents or to get a free credit report at www.annualcreditreport.com to find out who their lender is.

I can’t stress strongly enough, however, that the best way out of the student-debt trap is to sidestep it altogether. More on that in my next column.

Follow Janet's updates at Twitter.com/JanetBodnar.