Help, I Can't Afford My Student Loan Payments

William is stuck in a bottomless Chuck E. Cheese’s ball pit of student loan debt and Mommy isn’t there to pull him out. A decision to pay interest only on his three loans has backfired and now he can’t afford his payments and is in danger of defaulting. He’d like you, wise Consumerists, to survey his story and share your advice.

He writes:

I owe Sallie Mae $41,609.67 dollars in student loans, they are broken into 3 different billing groups. Two are Private loans and the third is a Federal Loan. After getting out of school i could not afford to pay the full sum of the loans and opted for their “SelectStep 4″ program. It lets you pay interest only on all the loans. the payment worked out to be around $500 of just paying interest and letting the principal stay the same. After the market crashed so did interest rates and the payment for interest only dropped to about $330 and since i could afford it i kept paying the $500 and applying the difference to the Principal on one of the smaller loans to get it paid off first.

What happened this month is i reached the end of the select step program and no longer am eligible to renew. The minimum payment is now $623.42. i have called them to ask them to consolidate or put me back on the interest only payment as it’s the only way i can afford to keep paying all the loans and keep them in good standing while actually paying down principal. The best they could offer was a 3 month Forbearance but as my financial situation will not change in 3 months this only delays the inevitable. i went through several different supervisors and claims representatives and all told me that was my only option, even when telling them one of the loans would have to default they would rather let that happen then offer me the same interest only plan i was on.

i’m at the point now that come August 20th i’m going to have to let either the 12k or 25k private loan default. I have tried to apply for a consolidation with other companies as Sallie Mae does not offer private Consolidation but i have a defaulted loan on my credit report currently (from 2005). My father was paying one of the loans a few years back from my first year of college and when he was sent to prison he defaulted and because i was also listed as a borrower i took the hit even though i settled the debt as soon as it was brought to my intention. it was too late as it was already in collections by the time i found out.

Even though my credit score is 702 and my wife’s is 720 no one will give me a Private Consolidation Loan and i’m certain it’s because of that. so here i sit typing this email to ask you all what should i do? what would you do? i mean i have no choice but to let a loan default. so do i let the $12k loan default and hope to settle it in collections or let all of them default and work out some kind payment plan with the Debt Collectors? I’ve conceded the fact that my credit is about to be royally screwed for years to come but i have no other way to get out from under this debt when the company would rather let me default then make a simple concession in their policies.

What would you do in William’s situation?