What Are the Steps to Making a Federal Loan Modification?

bank loansStudents who choose to walk away from their student loan obligations, rather than paying the amounts that they owe, can face a steep set of penalties. For example, in a piece produced by Businessweek, experts suggest that defaults on student loans can lead to a 15 percent skim off a student’s employment payments, Social Security disability payments and Social Security retirement income. Officials can also tack on a 20 percent collection charge, and all of those fees can’t be discharged in bankruptcy.

On the one hand, these sorts of penalties could generate revenue for the U.S. Department of Education, and those fees could be used to fund new loans. But keeping an entire group of workers chained to high debts they cannot pay without pain has a deeper impact on the economy as a whole, as these consumers might not be able to buy the goods and services that keep other workers employed.

As a result, the government has developed a variety of different programs that can help struggling students to pay the debts they owe. Here’s what these borrowers will need to do in order to take advantage of the help available to them.

Repayment Plan Options

The U.S. Department of Education website lists seven separate options students can use in order to pay back their student loans, including:

  • Pay as you earn repayment
  • Income contingent repayment
  • Income sensitive repayment

Most students are automatically enrolled in the standard repayment plan when they take out a loan, and they need to speak up and take action if they’d like to move into a different type of payment program. They must also make the switch before they miss a payment, in most cases, as the options available to students in default tend to shrink dramatically.

Making a Switch

While federal loans originate with the U.S. Department of Education, they’re administered by a variety of loan companies. These companies may not be part of the federal government, but they’re authorized to help borrowers find a repayment program that works for them, and they are capable of helping students follow the steps they’ll need to take to get loan relief from the government.

Students who need to switch can simply contact their loan servicers directly and explain why they’d like to move from one type of payment program to another. Often there are forms involved in the switch, in which students detail their financial situations and their need for some kind of relief. Once these forms are complete, they must be evaluated, and while they wait, borrowers must be sure to make their payments on time.

The paperwork might not be complete when the borrower is enrolled in the new program either, as some relief packages require borrowers to provide financial information on a yearly basis. Students might have changing circumstances that merit a higher or lower level of relief, and this additional paperwork can help loan officials to spot those changes.

If you’d like to find out more about how loans work, both on the public and the private level, please browse our website. We have a number of articles that might be of use to you as you determine how you’ll pay for school.


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