Federal student loan default rates are on the rise, but there's no need even in this weak economy for you to fall into arrears on your loans.
That's because when it comes to repaying an education loan, no one - except maybe Mom or Dad - is more lenient than your Uncle Sam.
Can't find a job? Or, the one you have barely pays the bills? Maybe you have decided to go back to school to wait out the recession. Whatever the situation, the government has options to provide relief - sometimes for years - from federal loan payments while you get your finances in order. You might even have your loans forgiven over time.
"If students are conscientious about it and they explore their options, there shouldn't be any reason they would be in default, even if they don't have a job," says Mark Lindenmeyer, director of financial aid at Loyola University Maryland.
You run into trouble, though, if you blow off repaying the taxpayers who put you through school. The government comes down hard. Real hard. It might garnishee your wages, apply future tax refunds to the debt, prevent you from renewing a professional license, hit you with interest, late fees and collection costs, and even ding your Social Security benefits in retirement.
The poor job market is blamed for the rising defaults in federal loans. For those in their early 20s - with or without a college degree - the unemployment rate is significantly higher than for their older counterparts. The Bureau of Labor Statistics reports the unemployment rate grew to 16 percent for those age 20 to 24 in November, while the overall unemployment rate dipped slightly to 10 percent.
You're in default if you haven't made a payment for 270 days, although it may take an extra three months before the default is final, says Mark Kantrowitz, publisher of FinAid.org.
The government measures defaults over a two-year period, looking at borrowers entering repayment one fiscal year and defaulting by the end of the next. The latest figures show the default rate rose to 6.7 percent for the period that ended October 2008, up from 5.2 percent a year earlier. Maryland's default rate increased from 5.5 percent to 6.3 percent.
The default rate could be heading higher. The government is changing how it calculates defaults for a more accurate picture, looking back three years instead of two. Official figures using the new formula won't be out for a few years, although the Department of Education released some preliminary numbers last week so schools know where they stand. Schools with high default rates are kicked out of the federal loan program.
Under the new formula, the most recent national default rate would jump about five percentage points to 11.8 percent, Kantrowitz calculates. (Still, that's better than in the early 1990s when nearly one out of four borrowers defaulted.)
At the first inkling that you might have trouble repaying your loan, contact your lender or loan servicer. For private loans, your options will depend on the lender. But here are some moves with federal loans:
Deferral : Loan payments can be suspended while you return to school half-time or more. You also can defer payments for up to three years if you can't find a job or have some other economic hardship, such as being on public assistance or joining the Peace Corps.
If the government paid the interest on your loan while you were in school, it will do so again in a deferment. If your loan wasn't subsidized, you'll owe the interest, which can be tacked onto the principal.
Forbearance : Don't qualify for a deferral? Your lender or loan servicer may approve a forbearance where payments are suspended or temporarily reduced while you gain your financial footing. A forbearance is granted for up to a year at a time, but for no more than three years. Interest will continue to accrue in a forbearance.
Repayment plans : The standard repayment is a fixed monthly sum for 10 years. If that's a struggle, consider one of several other payment plans. Keep in mind that with these others, you'll pay more interest over the life of the loan.
A graduated repayment plan, for instance, starts out with low payments that gradually increase (let's hope, along with your income) over 10 years. An income-sensitive plan - available if you got a federal loan through a private lender - adjusts payments up or down based on income, usually over 10 years. Extended repayment is for those with more than $30,000 in loan debt, allowing them to stretch out payments for as long as 25 years.
Income-based repayment, introduced in July, might be for you if your debt is steep compared with your pay. Payments are limited to 15 percent of discretionary income, determined by a formula tied to the poverty level. It's possible your payments could even be zero if earnings are low enough. Each year, your situation will be reviewed and payments can go up if income rises.
After 25 years of making payments under this plan, any remaining balance is forgiven. Debt can be forgiven even faster if you make 10 years' worth of payments while working in public service.
Consolidation: You might also be able to lower your monthly payment by consolidating your student loans into one new loan and extending the repayment period. The higher the debt, the more time you get to repay. You can take up to 30 years if you're shouldering $60,000 or more in loans.
You can lessen your chances of defaulting even before starting college by comparing what you're likely to earn in your future career and the price of the college, advises Vince Pecora, director of financial aid at Towson University.
"At the end of the day, you have to pay back the loan based on your income," Pecora says.
A rule of thumb is that loan payments shouldn't exceed 8 percent to 10 percent of gross monthly pay, says Bob Murray, a spokesman with USA Funds, the nation's largest student loan guarantor.
Also, once in school, "the most important thing is to finish your degree and finish it in a timely matter. Most of the defaulted borrowers we see are those who did not complete their program," Murray says. They leave school with debt, but without the degree to land a good-paying job to repay their loans, he says.