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A break with student loans?

Question: I was doing 'ok' paying down credit card debt until HSBC raised everyone's APR 10%, mine went from 14% to 24%, now I am really struggling. My Student Loan payments are $600.00 a month. Is there any word on the possibility of a hiatus on making Student Loan payments for a few months, or better yet, a year for those of us in trouble? It would really help! Patricia, Washington D.C.

Answer: Arrgghhh. The still all-too-common tactic by banks hiking their credit card interest rates in this environment burns me. It's a bad move at a time when the taxpayer is bailing out the financial system.

That said, at the moment I'm not aware of any new legislative initiatives (with credibility and momentum) that aims at giving financial breathing room to anyone paying back their student loans. That could change, of course, since much of the $825 billion fiscal stimulus package remains to be negotiated before the legislation ends up on the President's desk.

Still, according to a recent story in Inside Higher Ed, it appears tens of billions of dollars are heading toward colleges and universities.

The initiatives highlighted by Inside Higher Ed would help out a number of students and their families. For instance, there's a proposed nearly $16 billion increase in Pell Grant funding, boosting the maximum Pell Grant by $500 to $5,350; an additional $490 million for federal work study funds; almost $13 billion to replace the Hope tax credit with a new tax credit worth up to $2,500 a year; and a $2,000 increase in federal limits on unsubsidized loans.

Two quick thoughts: Make sure to take advantage of all the tax deductions and tax credits you qualify for. Hopefully, you'll get a refund that you can put toward reducing the credit card debt. Similarly, you might get additional tax payments depending on what becomes law over the next few weeks.

Secondly, if toughing it out isn't working and you really need to reduce your monthly debt payments you could look into changing your student loan repayment options. There is a financial flexibility built into federal student loans. (The same can't be said for private student loans.) However, all the different ways to lower your monthly bill today come with a price: You end up increasing the overall cost of the loan.That's why if you or anyone else goes this route I always recommend getting more aggressive about paying down the loan later on when times are better. There is no prepayment penalty with student loans.

The main options for lowering the monthly payment are the Graduated Repayment Plan (payments start out low and increase over time), the Extended Repayment Plan (stretch out the payments), an Income-Based Repayment Plan (your monthly payment rises and falls with your income), the Income Contingent repayment plan (the payment can't exceed 20% of discretionary income), and the Income Sensitive plan (monthly payments are a percent of gross monthly income).

You can learn more about these loan options at Finaid at www.finaid.org/loans/repayment.phtml. If you are in more dire straits you could also qualify for student loan forbearance or deferment. Finaid also offers up good information on those two options.

Good luck.

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