Managing Student Loan Debts
Whether you’ve just graduated, are taking a break from school, or have already started repaying your student loans, these tips will help you keep your student loan debt under control. This means avoiding fees and extra interest costs, keeping your payments affordable, and protecting your credit rating. If you’re having trouble finding a job or keeping up with your payments, there’s important information here for you, too.
Know Your Loans: It’s important to keep track of the lender, balance, and repayment status for each of your student loans. These details determine your options for loan repayment and forgiveness. If you’re not sure, ask your lender or visit the National Student Loan Data System or www.nslds.ed.gov. You can log in and see the loan amounts, lenders, and repayment status for all of your federal loans. If some of your loans aren’t listed, they’re probably private or non-federal loans. For those, try to find a recent billing statement or the original paperwork that you signed. Contact your school if you can’t locate any records.
Know Your Grace Period: Different loans have different grace periods. A grace period is how long you can wait after leaving school before you have to make your first payment. For federal Stafford loans it’s six months and nine months for federal Perkins loans. For federal PLUS loans, it depends on when they were issued. The grace periods for private student loans vary, so consult your paperwork or contact your lender to find out. Don’t miss your first payment!
Stay in Touch with Your Lender: Whenever you move or change your phone number or email address, tell your lender right away. If your lender needs to contact you and your information isn’t current, it can end up costing you. Open and read every piece of mail – paper or electronic – that you receive about your student loans. If you’re getting unwanted calls from your lender or a collection agency, don’t stick your head in the sand – talk to your lender! Lenders are supposed to work with borrowers to resolve problems, and collection agencies have to follow certain rules. Ignoring bills or serious problems can lead to default, which has severe, long-term consequences.
Pick the Right Repayment Option: When your federal loans come due, your loan payments will automatically be based on a standard 10-year repayment plan. If the standard payment is going to be hard for you to cover, there are other options. You can also change plans down the line if you want or need to. Extending your repayment period beyond 10 years can lower your monthly payments, but you’ll end up paying more interest over the life of the loan. Some important options for student loan borrowers are income-driven repayment plans such as Income-Based Repayment and Pay As You Earn. These cap your monthly payments at a reasonable percentage of your income each year, and forgive any debt remaining after no more than 25 years (depending on the plan) of affordable payments. Forgiveness may be available after just 10 years of these payments for borrowers in the public and nonprofit sectors. To find out more about Income-Based Repayment and related programs and how they might work for you, visit IBRinfo.org.
· Private Loans: Private loans are not eligible for IBR or the other federal loan payment plans, deferments, forbearances, or forgiveness programs. However, the lender may offer some type of forbearance, typically for a fee, or you may be able to make interest-only payments for some period of time. Read your original private loan paperwork carefully and then talk to the lender about what repayment options you may have.
How much should you pay? Most borrowers pay their student loans within ten years, but this is by no means the only payment option available. Depending on your financial circumstances, you may want to accelerate your payments, or lengthen the term and concentrate on paying off higher interest debts first. Before you make a decision, first analyze your total financial situation. Make a detailed budget to review your income, expenses, and debt. After you understand how much you have to work with, you can decide which payment plan will work best for you. Many lenders offer a variety of repayment plans for loans in good standing, particularly for federal loans. Perkins loans generally have their own payment arrangements, however. Private loans tend to be difficult when it comes to negotiation, but contact your lender for a possible payment restructure.
Accelerated – There are no prepayment penalties for student loans. If you have no other loans with a higher rate of interest, stepping up your payments will save you a lot of money. This is a good option for people who can afford higher payments.
Standard – This is the original plan most lenders immediately offer borrowers. To estimate payments, figure about $125 per month for every $10,000 borrowed. Payments are fixed for up to ten years, although payments on variable interest rate loans may increase or decrease over the life of the loan.
Graduated – Payments may start out as low as half of what the standard plan may offer (but never below the interest amount), are increased every two to three years, and can be stretched out from 10 to 30 years. This plan may be appropriate for you if your income is low now, but you expect to earn more in the future.
Extended – This plan enables the borrower to have fixed monthly payments over a period of 12 to 30 years. Though you will pay more in interest than other plans, it is great for those needing low payments over the long-term.
Income Contingent – Income, family size, and loan amount are taken into consideration when determining your monthly payment for this plan. Your financial circumstances are reassessed every year, and as your income rises and falls, so does your payment. If your income is low or unstable, this plan may be right for you.
Consolidation – You can lower your monthly payments by combining several loans into one packaged loan and extending the repayment period. Consolidation may be a good option for you if the bulk of your loans are federal (private loans are generally not combined with federal loans), the interest rate is better than what you are currently receiving, and you have at least $7,500 in total eligible loan debt.
Don’t Panic: If you’re having trouble making payments because of unemployment, health problems, or other unexpected financial challenges, remember that you have options for managing your federal student loans. There are legitimate ways to temporarily postpone your federal loan payments, such as deferments and forbearance. For example, an unemployment deferment might be the right choice for you if you’re having trouble finding work right now. But beware: interest accrues on all types of loans during forbearances and on some types of loans during deferment. Ask your lender about making interest-only payments if you can afford it.
Stay out of Trouble! Ignoring your student loans has serious consequences that can last a lifetime. Not paying can lead to delinquency and default. For federal loans, default begins after nine months of non-payment. When you default, your total loan balance becomes due, your credit score is ruined, the total amount you owe increases dramatically, and the government can garnish your wages and seize your tax refunds if you default on a federal loan. For private loans, default can happen much more quickly and can put anyone who co-signed for your loan at risk as well. Talk to your lender right away if you’re in danger of default.
· Defaulted Loans: Your loans will be in default if your payments are more than 270 days past due and you haven’t made any overtures towards paying. The consequences of default are severe, and can include aggressive collection tactics, tax refund interception, lawsuits, and non-judicial garnishment of your net wages. You may also be ineligible for deferments, flexible repayment options, grants, and new student loans. Collection fees will substantially add to the balance as well.
· Credit Problems: A default notation will appear on your credit report and since there is no statue of limitations on student loans, the negative impact may follow you indefinitely. You have the legal right to get out of default with a one-time only “reasonable and affordable” payment plan. After 12 consecutive payments your loan will be automatically rehabilitated. You must submit a written request to the holder and include a budget if you offer less than $50 per loan. After six payments you will be eligible for new federal loans or grants, and after 12 payments your loans come out of default and the notation is removed from your credit report.
Lower Your Principal If You Can: When you make a federal student loan payment, it covers any late fees first, then interest, and finally the principal. If you can afford to pay more than your required monthly payment – every time or now and then – you can lower your principal, which reduces the amount of interest you have to pay over the life of the loan. Include a written request to your lender to make sure that the extra amount is applied to your principal! Otherwise it will automatically be applied to future payments instead. Keep copies for your records and check back to be sure the overpayment was applied correctly.
Pay Off the Most Expensive Loans First: If you’re considering paying off one or more of your loans ahead of schedule or trying to reduce the principal, start with the one that has the highest interest rate. If you have private loans in addition to federal loans, start with your private loans since they almost always have higher interest rates and lack the flexible repayment options and other protections of federal loans.
Loan Forgiveness: There are various programs that will forgive all or some of your federal student loans if you work in certain fields or for certain types of employers. Public Service Loan Forgiveness is a federal program that forgives any student debt remaining after 10 years of qualifying payments for people in government, nonprofit, and other public service jobs. Find out more at IBRinfo.org. There are other federal loan forgiveness options available for teachers, nurses, AmeriCorps, PeaceCorps volunteers and other professions, as well as some state, school, and private programs.
Student Loan References:
Department of Education’s Debt Collection Services for Student Loans – Locates student loans, can be reached at 800-621-3115
Corporation for National and Community Service (AmeriCorps) – Cancels debt through community service, can be reached at 800-942-2677
Federal Student Aid Information Center – Provides information on basic terms of Federal Loans, can be reached at 800-433-3243
Department of Education Consolidation Department Loan Origination Center – Loan consolidation, can be reached at 800-557-7392
Federal Trade Commission – Fair Debt Collection Practices Act information, can be reached at 877-FTC-HELP (382-4357)
William Ford Direct Loan Program – Consolidation, information, can be reached at 800-848-0979
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