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March 10, 2009

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When you're cash-strapped, there is an under-used method to lower your monthly student loan payments. It's not very talked about. And most college grads have no idea this option is available to them. I'm talking about negotiating with the federal government for a reduced monthly payment. Many people mistakenly think this is not possible. But the truth of the matter is: It is not only possible, it's perfectly acceptable under federal law. You just have to learn how the system works--which is exactly what I'm about to reveal.

Let's say your finances are really tight because you got sick and had medical bills that your insurance company wouldn't cover. Moreover, you have two children. They're both under five years old and one of them has special needs. So you pay for day care expenses every week and for a highly skilled, reliable, and experienced caregiver/special education teacher to watch the kids while you work.

And let's also add into the mix that you live in a rural area--or maybe even in a big city--but you have one whopper of a commute to work, so your transportation costs are much higher than normal. (By the way: commutes of an hour or more are increasingly common. I used to have a crazy commute--2 = hours each way from Philadelphia to New York via Amtrak each day. Mercifully, that was before my kids were born.) In any event, my point is that you don't have a cookie-cutter life that fits nicely into some government prescribed formula about what your "normal" monthly expense are or should be. If your lifestyle happens to be expensive--and I'm not talking about because you're buying designer bags or living high on the hog--then you may be able to get some relief from the Department of Education.

The secret lies in obtaining and properly filling out one critical form called a "Statement of Financial Status." This form isn't particularly onerous; it's just two pages, plus one page of instructions. You can find it online at the Department of Education: http://www.ed.gov/offices/OSFAP/DCS/forms/fs.pic.pdf.

To complete the form, you'll be asked to declare your income, and show evidence of it with two paycheck stubs and two years worth of tax returns. You'll also need to list all your monthly bills, itemizing what you owe to whom and in what amounts. If you make quarterly or annual payments--on things like auto insurance or property taxes--break that down into a monthly amount and include that in your tally of monthly expenditures.

The Statement of Financial Status asks for pertinent identifying information, such as your social security number. The Department of Education also requests the name, phone number and address of your employer. To some of you, this may seem like a big hassle. But it's nothing like the much greater hassle you could face down the road (keep reading below about wage garnishments) if you get behind on your student loan payments and find yourself on the wrong side of the Department of Education. A much better alternative is to simply ask for help now.

State your case to the Department of Education as clearly and concisely as you can, letting the numbers speak for themselves. If your debts are unusually high, it can't hurt to include a brief statement--no more than one page, perhaps two at most--explaining the particulars of your circumstances. And here's a key point: Make sure you know what the average costs are for various expenses in your region, like food, housing, transportation, and so on. You can find out this information by going to the website of the IRS. Check out the link at: http://www.irs.gov/individuals/article/0,,id=96543,00.html.

If your expenses are out of whack with regional or national averages, be sure to state why it is that your costs are much higher. Don't just leave it up to some loan officer to look at the numbers alone and make a determination about you as if you were just a statistic. Give them a glimpse into the real life issues you're facing and your dire financial straits--without going overboard or being unnecessarily dramatic about things.

One of the best parts about this "Statement of Financial Status" is that the Department of Education puts you in the driver's seat. They ask you what's reasonable for you given your circumstances. They ask you to say how much you can afford to pay--and to show good faith by sending in a check for that amount. So the next step is for you to do just that: Submit your statement and accompanying check for the proposed amount of the monthly payment you'd like, adhering to their rules precisely in all regards. Don't send cash; use a check or money order and write your social security number on it. I recommend that you mail the statement and check through the U.S. Postal Service, sending it certified mail, return receipt requested, to this address:

U.S. Department of Education
P.O. Box 4169
Greenville, TX 75403-4169

After this, it's a waiting game. You'll just have to sit tight and wait to get the Department's response. If you've done a good job of documenting your expenses, and explaining why your bills are higher than normal, you should receive exactly what you requested. At the very least, you'll get a reduced payment than what your lender, guaranty agency, or the Department of Education originally sought.

--From Chapter 5, Zero Debt for College Grads

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