Your Study Guide to Paying off Student Loans

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It’s not unusual for college tuition to cost $30,000 or more a year. Some students are able to pay for it with savings, grants or scholarships. However, many have to turn to student loans to finance at least some or all of their costs. Taking out student loans can pay off in the long run because having a college degree usually makes it easier to get well-paying jobs. However, if you borrowed a hefty chunk of change, repaying your loans may seem like a daunting task. Student loan payments can rival those of a mortgage, and most graduates aren’t bringing in $300,000 a year at their first job. However, there’s no need to change your name and flee the country; it’s completely possible to repay your student loans and avoid default, even if you’re facing economic hardship.

What types of student loans do you have?

Knowing what types of student loans you have is very helpful, as it can affect repayment options. One important distinction is whether the loan is public (meaning the government is either the lender or guarantor of the funds) or private. There are two major federal student loan programs: the Direct Loan Program and the Federal Family Education Loan (FFEL) Program. Both programs offer Stafford and PLUS loans.

The Stafford loan is the most common type of student loan and can be either subsidized or unsubsidized. If your loan is subsidized, the government pays your interest while you’re in school or a period of deferment. If your loan is unsubsidized, you’re responsible for the interest as soon as the funds are disbursed – while you’re in school or deferment, you can choose to either pay the interest as it accrues or have it added to the loan balance (capitalized). PLUS loans are made to parents and graduate students and are always unsubsidized.

Private loans are made by lenders with no government involvement. They’re generally not subsidized. While federal student loan holders have many options available to them under the law, such as alternative repayment plans and deferment, private lenders aren’t required to offer these options.

What if you don’t remember what types of loans you have? Look for your loan documents – you or your parents should have them somewhere. Also, you can call your lenders and ask. You can access information about federal student loans from the National Student Loan Data System.

When do you have to start paying your student loans?

In general, you don’t have to repay your student loans while you’re in school (as long as you’re enrolled at least half-time). For Stafford loans, your first payment is normally due six months after graduating. For PLUS loans, the borrower is given the option of starting repayment either within 60 days after the funds are disbursed or waiting until six months after the student has graduated or dropped beneath half-time enrollment. If you have private student loans, you should talk to your lender about when you have to start repaying.

Who should you pay?

Student loans, like mortgages, are often sold by the loan originator on the secondary market. To further confuse matters, lenders sometimes hire a servicer – a third party who collects payments. If you fell behind with your payments, it’s possible your loan was sent to a collection agency or, for federal student loans, your state’s guarantee agency or the Department of Education. Whenever a loan is sold or payment collection duties are transferred, you should be notified. If you’re not sure who to pay, check your mail to see if you received a notice. You can also check your credit report or call the original lender.

Repayment plans

For Direct and FFEL loans, there are several repayment options available:

Your Study Guide to Paying off Student Loans
Standard repayment plan

This is the default plan borrowers are put on when you start making payments. You pay a fixed monthly amount for ten years or less. The monthly payment is the highest under this plan.

Graduated repayment plan

Payments can start out as low as half of what the standard plan offers, but never below the interest amount, and are typically increased every two years. If you owe enough, you can combine this plan with the extended repayment plan. Otherwise, the loan must still be paid off in 10 years, meaning the later payments will be higher than under the standard plan. This plan may be appropriate for you if your income is low now, but you expect it to increase significantly in the future.

Extended-contingent repayment plan

This plan allows you to stretch the length of your repayment period to up to 25 years, which lowers your payment. You must owe at least $30,000 to use this plan.

Income-contingent repayment plan

Direct loans only, excludes parent PLUS loans. Income and family size are taken into consideration when determining your monthly payment for this plan. For those with limited income, the monthly payment can be very low, even less than the interest charges. The repayment period can last longer than 10 years, and any loan balance remaining after 25 years of payment is canceled.

Income-sensitive repayment plant

FFEL loans only. Like with the income-contingent repayment plan, your monthly payment is based on your income. However, the payment must cover at least the interest, and the repayment period is limited to 10 years, so later payments will be higher.

Income-based repayment plan

Not available for parent PLUS loans. In order to qualify, you must have a certain level of student loan debt relative to your income and family size. Borrowers may be able to get a lower payment with the income-based repayment plan than the income-contingent or income-sensitive repayment plan. The monthly payment amount can be less than the interest charges, and any loan balance remaining after 25 years is canceled. For FFEL loans, you have a right to switch your repayment plan once a year. For Direct Loans, you can switch plans as often as you want. Alternative repayment plans may not be offered on private loans, but if you’re struggling, you can talk to your lender about the possibility of restructuring your loan.

Consolidation

You may be able to get a lower payment by consolidating your loans into one payment. You don’t have to be current with payments to consolidate – in fact, many delinquent borrowers use consolidation to get back on track. You can’t combine your private loans with your federal loans into a federal consolidation loan. You can consolidate your federal loans and private loans with a private consolidation loan, but this isn’t recommended, as you lose the rights granted to federal loans, such as deferment and alternative repayment plans.

Cancellation / forgiveness

The circumstances under which a federal student loan may be canceled in full include the death or permanent disability of the borrower or attendance at a school where you were either falsely certified or the school closed before you could complete the program. Some federal loans are eligible for full or partial forgiveness if you’re a member in a uniformed service, teach or provide services to needy populations, work in a health care profession or law enforcement, or participate in a government volunteer program. Check with your school, lender or employer for details about cancellation.

If you can’t pay

If you find yourself unable to pay your federal student loans, you may be able to get relief with a deferment or forbearance. A deferment is a temporary suspension of payments. If your loans are subsidized, the interest will be suspended; if not, interest will continue to accrue. Deferments are only permitted under certain circumstances, including enrollment as at least a half-time student, temporary total disability, enrollment in a graduate fellowship program, unemployment or other economic hardship, active duty in the armed forces, or participation in a rehabilitation program for the disabled. Forbearance is similar to deferment, only interest continues to accrue regardless of whether your loans are subsidized. They’re granted for such reasons as a high monthly payment relative to your income, medical hardship or other unforeseen problems. If you have subsidized loans, obviously a deferment is preferable, but a forbearance is generally easier to obtain. Some private lenders may offer forbearances, but they’re not required to do so.

A loan is considered in default if you don’t arrange a deferment or forbearance and are more than 270 days past due. The consequences of default are severe and can include aggressive collection tactics, tax refund interception, lawsuits and non-judicial garnishment of up to 15% of your net wages. You’ll also be ineligible for deferments, alternative repayment plans, grants and new student loans. Collection fees, which can be significant, will be added to your balance. Additionally, a default notation will appear on your credit report, and since there’s no statute of limitations on student loans, the negative impact may follow you indefinitely if you continue to not pay. For federal student loans, you have a one-time right to get out of default with a “reasonable and affordable payment plan”. If they want you to pay an amount you feel you can’t afford, be persistent in pushing for an amount you’re comfortable with – it may be helpful to send them a copy of your spending plan. Once you make nine on-time payments your loan is taken out of default.

Resources

National Student Loan Data System
Allows you to look up information about your loans
800.433.3243

Federal Student Aid Office
Gives information on loan repayment, forgiveness, deferral and forbearance
800.433.3243

National Consumer Law Center’s Student Loan
Borrower Assistance Project - lays out repayment options for borrowers