Alternatives to Student Loan Forgiveness
Forgiveness of a student loan implies that you will no longer be required to repay some or all of the accrued amount. Having your debts cleared off in one sweep might seem like the best option, but it also comes with a fair share of negative financial implications.
Accordingly, here are some alternatives that you should explore before opting for student loan forgiveness.
Refinancing an existing student loan helps you lower the monthly installment. When you are refinancing student loans, a private lender pays off your existing loans and combines them with a new interest rate and repayment schedule on a new loan.
Going forward, you pay the new lender as per the terms. This way, you can keep playing while your credit score will also be strengthened in the process. However, note that refinancing federal student loans will disqualify you from availing income-driven repayment plans and other benefits.
Although refinancing is available for both federal and private loans, not everyone gets approved. To qualify for refinancing you’ll need:
- A decent credit score (600 and above),
- A steady income,
- A co-signer (in some cases).
If you are eligible for lower rates, refinancing is a better option than applying for loan forgiveness.
Deferment or Forbearance
Deferment and forbearance are two other options. We say two because there is a difference between either, although many lenders use these terms in a similar sense. Instead of not paying at all, you can request the lender to give you some extra time.
Based on your previous payment history, lenders may agree to defer your monthly payments for a fixed period (mostly 6-month spans).
You might be asked to pay the interest accrued during the deferred period, also known as capitalization. However, the good thing is that a deferment doesn’t negatively impact your credit score.
Forbearance, on the other hand, needs you to pay accrued interest for the term, which is then added to the outstanding principal. Forbearance of student loans is a choice you should use sparingly. Think of it as the final effort to avoid defaulting on loans.
You shouldn’t apply for forbearance unless you have exhausted your options for a student loan deferment or income-driven repayment plan.
Income-driven repayment (IDR) allows you to set the monthly payment at an amount that is affordable based on several criteria including your income, family dependency, and liabilities. It is mostly available with federal loans but for private student loans, it totally depends at the discretion of the lender. There are multiple IDR options to choose from:
- Income-Based Repayment
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Contingent Repayment
The easiest way to determine the most suitable option is to consult directly with the lender. Irrespective of the option chosen, you will be paying additional interest in the extended term. Additionally, you will have to submit proof of eligibility every year. The most common documents that you’ll be needing are:
- Recent pay stubs
- Letter from employer defining your gross salary
- Documented proof of income-expense and all liabilities
That said, income-driven repayment is a good choice if you know that you will be able to increase your disposable income in a few months.
To set things clear – there are two types of student loan consolidation - (a) federal student loan consolidation, and (b) private student loan consolidation (also called student loan refinancing). Federal consolidation combines multiple loans into a single loan through the US Department of Education. You won’t necessarily get lower interest rates, but the monthly payments can be lowered by extending the loan term.
Consolidating a private loan is dependent on the lender. You may want to double-check the available rates and fees involved before opting for consolidation. The good thing, unlike federal loans, is that you might be eligible for lower rates while consolidating private student loans. It is a good option because it keeps the doors open for an income-driven repayment plan as a backup.
Most lenders will check your payment history, liabilities, and credit score (690+ is desirable in most cases). In extreme cases, your eligibility also depends on getting a co-signer. Consolidation is a recommended choice if you have a stable income and have made on-time payments on the student loan.
Talk to Your Lender
Ask any borrower who has been through the same problem and they’ll agree to the fact that speaking directly with your lender is possibly the best option. Financial problems can happen to anyone, hence there is no point shying away from it. If you are running into a frequent shortage of funds, you will risk defaulting the loan account which will leave a negative mark on your credit score.
Instead, you can talk to your lender about the situation and come to an amicable settlement. Lenders are interested in recovering their funds and explaining your situation will help them suggest a plan of action or solution that is agreeable for both parties. You can lower your installments temporarily, get it refinanced, or come up with a different repayment plan – there are many possibilities.
Ask For Help From Your Employer
This might seem far-fetched, but you might want to speak to your employer (or at least with someone from the HR team). Try learning if your company offers a salary advance or any other similar benefits for employees. If yes, understand the requirements, and apply accordingly.
While we do not recommend this, bankruptcy is another option to get rid of your student loan. To have your student loan forgiven for bankruptcy, you have to show that repaying loans would be an undue hardship for you. The method used to assess undue hardship differs across courts. However, many courts are reluctant to write off a student loan based on bankruptcy.
We recommend seeking legal counsel before you decide to file for bankruptcy.
Consider These Brands for Refinancing or Repayment Alternatives
CommonBond – One of the oldest and leading lenders, they offer refinancing on student loans to graduates and their parents who have Parent PLUS loans. If you are ready to use a co-signer and have a private student loan, you will appreciate their rates and flexible terms.
Credible – They have a lot of options to choose from and have a quick application process. This lender doesn’t charge any application or origination fees on their student loans and gives you a $750 gift bonus card when you repay the loan.
SunTrust – Access competitive rates, a complete suite of application and tracking tools, prompt customer service, and a plethora of loan options to choose from. Besides these advantages, they are the 6th largest bank in the US with $199 billion+ in assets.
Ascent – If you don’t have a co-signer and/or an average to low credit score, this is one lender that will accept your application. The interest rates can get a bit higher, but you also have higher chances of getting approved.
Student loan forgiveness is a rather tempting option, but you need to assess the potential drawbacks as well. Besides stringent qualifying criteria, there are added problems of extended interest rates, taxes, and the credit score impact.
You should consider it as the last option and not use it before you have tried and exhausted the other alternatives listed above.