Repayment Options for Student Loans
Attention: Heavily-indebted college grads:
The U.S. government, which so generously supported your pursuit of higher education through its federal student loan program, is serious about your paying that money back.
How serious? Very serious.
If you should neglect your student loan payments for more than 270 days and your loan goes into default, the federal government will:
- Deduct your loan payments from your paycheck.
- Withhold any state and federal income tax refunds and apply the refunds to the amount you owe.
- Notify the credit reporting agencies about your default, thereby damaging your credit rating and making it difficult for you to qualify for a car loan or home loan or even a credit card.
- Charge you late fees and collection costs on top of the amount you owe.
- Deny you federal student aid if you decide to go back to college.
- Sue you in court for the outstanding balance plus attorneys’ fees and court costs.
And if you think filing for bankruptcy will make your big, bad federal student loan debt go away, think again. Federal student loans cannot be discharged in bankruptcy.
And you can expect the federal government to continue to collect on your student loans for at least 25 years.
It’s essential that you be serious about making your student loan payments from the get-go.
Your best bet is to pick a student loan repayment plan that fits your budget and stick with it “through every financial high and low” until your federal education debt is paid in full.
With federal Stafford loans, you have four key repayment options: standard repayment, extended repayment, graduated repayment, and income-based repayment.
Repayment terms range from 10 years to 25 years depending on the amount owed and the repayment plan selected.
Standard repayment: With standard repayment, you pay a set amount each month over a 10-year repayment period.
Extended repayment: With extended repayment, you pay a set amount each month but your repayment term is stretched out. An extended repayment can last anywhere from 12 to 25 years. With this payment plan, your monthly payment is lower but you wind up paying more interest over the life of the loan.
Graduated repayment: With graduated repayment, you begin with small payments and work your way up to larger payments during the course of your repayment period. Your payment amount usually increases every two years.
Income-sensitive or income-contingent: With these repayment plans, the monthly payment amount is based on the income you report on your federal tax return. As your yearly income rises and falls, so do your student loan payments.
The income-sensitive plan is available for Stafford loans in the Federal Family Education Loan program (FFEL) and the income-contingent plan is available for loans in the William D. Ford Federal Direct Loan Program (DL).
In the FFEL program, the money is borrowed from a bank or credit union or other lender participating in the program. With direct loans, the money is borrowed directly from the federal government and borrowers make repayments to the federal government.
A new income-based repayment plan will be available to FFEL and direct loan borrowers beginning in July 2009, thanks to the College Cost Reduction and Access Act. Under the new plan, loan payments will be limited to 15 percent of a borrower’s discretionary income.
You won’t need to make your first payment on federal Stafford loans until six months after you graduate or leave school, so you have a bit of time to contemplate which repayment plan may be right for you. (And if you drop below half-time enrollment, you also have six months before you’ll need to begin payments on federal Stafford loans.)
Calculators from the U.S. Department of Education let you compare monthly loan payments on each type of repayment plan. Study your options carefully.
You may be able to nudge down the interest rate on your student loan by agreeing to pay your loans online or by allowing payments to be automatically deducted each month from your checking account or savings account.
Setting up an automatic payment is a quick and convenient way to pay your student loans. You won’t have to write a loan check every month and your payment will always be on-time. Just make sure there is enough money in your account to cover the payment each and every month.
If you ever find yourself struggling to meet your federal student loan payments because of unemployment or economic hardship, contact your lender and ask about options for temporarily postponing or reducing your payments.
Deferment: You may have a right to postpone payments on your loan by getting a deferment. A deferment is a temporary suspension of loan payments because of a specific circumstance such as unemployment or financial hardship. The federal government pays the interest rate on a subsidized loan while payments are deferred. The government will not pay the interest on an unsubsidized loan while payments are deferred.
Forbearance: If you’re not eligible for a deferment, you may still be able to receive forbearance. Forbearance is a temporary postponement or reduction of loan payments. Unlike a deferment, you are responsible for the interest on the loan during forbearance.
Every Stafford loan borrower is entitled to deferment due to economic hardship or unemployment for up to three years, as long as the borrower meets eligibility requirements for these deferments.
Lenders of Stafford loans may also offer forbearance for up to 12 months at a time for up to three years. But you’ll lose these benefits if your student loan falls into default.
So be sure to contact your lender at the first signs of financial trouble.