One thing that makes student loans different from other kinds of debt — and one reason that it is very important to plan carefully for repayment both now and in the future — is the fact that they are nearly impossible to get rid of otherwise, even in bankruptcy. Contrary to popular belief, the discharge of student loan debt in bankruptcy is not strictly prohibited. Unlike most forms of debt (credit cards, mortgage, etc.), student loan debt is not discharged as part of the normal bankruptcy process. But a debtor can request their discharge if she can demonstrate that not discharging the student loans would cause herself and her family an “undue hardship”. This is not easy. In 2008, well over a million people filed for bankruptcy, and of those about 72,000 were carrying some form of student debt. Only 29 could convince the court to discharge even a portion of their student loan debt.
There have been proposals in Congress to change the law, so that private student loans would be treated as ordinary debt in bankruptcy. These proposals have not gone anywhere yet, and they have never included such treatment for federally-guaranteed student loans.
So your student loans are with you for life, or at least until you pay them off. But what if you can’t pay them? Planning for the future is important and admirable and all, but what if something unexpected leaves you without the resources to follow through on even a carefully thought-out plan? When that happens, you need to hit the emergency brake:
Deferments/forbearance. When a crisis like unemployment or illness makes it impossible to make even a reduced monthly student loan payment, a borrower can apply for a deferment or forbearance. Both options allow for a temporary suspension of loan payments, usually in increments of six months or a year. They can be renewed, if needed, but there are cumulative limits. Federal loans can be deferred for a total of no more than three years, and forborne for a total of no more than five. Private loans usually have lower limits. For most federal loans, a deferment is preferable, because the government will pay the interest that accrues during the deferment period; during a forbearance, interest simply gets added to the loan, to be repaid later.
Either option will give a borrower some breathing room to contend with unforeseen circumstances. But a borrower in such circumstances should keep two things in mind. First, don’t wait to get in touch with your loan provider. Once it becomes clear that you will not be able to make payments on your loans for an extended period, apply for a deferment or forbearance before you fall behind. Missing payments will damage your credit record, and if you fall too far behind and go into default, deferment and forbearance will no longer be available. Second, once you obtain the breathing space that suspended payments will give you, start planning immediately for how and when you will begin making payments again. Deferment and forbearance are short-term tools that help to keep your options open; they should not be considered long-term fixes.