Student Loans – Bankruptcy Option

Federal vs. Private Student Loans – Bankruptcy Option

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Differences between federal and private student loans include:

  • Entering Repayment –You do not need to begin settling federal student loans till you finish, leave institution, or are registered less than half-time. Nevertheless, numerous personal trainee lendings enter payment standing while you are still in school.
  • Interest Rates – Interest rates for federal loans are fixed and often much lower than private student loan rates, which are often variable and can be three times that of a federal loan.
  • Credit Score – Federal student loans do not require a credit check or a specific credit score for qualification. Private student loans, on the other hand, often require established credit and interest rates often depend on your credit score.
  • Cosigner – Federal student loans do not require a cosigner in most situations; however, private student loans often require a cosigner. Cosigners are then on the hook if you’re unable to make payments.
  • Consolidation – If you have multiple federal student loans, they can be combined into one loan with one payment. Private student loans cannot typically be consolidated.
  • Prepayment Penalties – Federal student loans may be repaid at any time; however, private student loans may include a prepayment penalty fee that discourages you from paying off early so that you are forced to pay interest for a longer amount of time.
  • Loan Forgiveness – If you work in public service, you may qualify for full or partial loan forgiveness for federal student loans. However, it is unlikely that your private lender offers loan forgiveness for any reason.

Repayment Options

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  • Deferment – You may temporarily postpone repayment of student loans while you are attending college at last half-time, while experiencing economic hardship, during periods of active military service, and a variety of other reasons. Under deferment, your principle and interest payments are delayed. Interest does not continue to accrue.
  • Forbearance – You may temporarily postpone student loan payments for several reasons, including poor health or financial hardship. Under forbearance, interest continues to accrue.
  • Standard Repayment – Student loan payments are a fixed amount for a fixed number of years. Both federal and private student loans may use this type of plan. However, private student loans may periodically change payments based on a variable interest rate.
  • Graduated Repayment – Student loan payments start lower and then increase gradually each year.
  • Extended Repayment – Student loan payments may be fixed or graduated, but the length of time to repay is extended, essentially lowering monthly payments. This would also result in greater interest payments upon full repayment.
  • Income-Based Repayment (IBR) – Student loan payments may be set according to your household income. If you start an entry-level job with lower pay, you will have lower payments. Those payments may increase as you advance through your career and receive a higher income.
  • Pay As You Earn Repayment (PAYE) – Student loans may be based on 10 percent of your discretionary income. Like IBR plans, this may result in higher payments as your income increases; however, it also considers your expenses and is based only on your discretionary income.

Most federal student loans allow repayments according to any of these plans; however, private student loan companies are not likely to offer so many options. You may be able to defer or forbear private student loan payments for a short period of time, but once it falls into repayment, you will have significant payments that can be difficult to manage.

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