Student loan repayment basics
Completing Exit Counseling for a Student Loan
When you are getting ready to leave college, your financial aid office will send you a notice that you are required to complete exit counseling for your federal (Perkins, Direct, and GradPLUS) student loans. Failure to do so could mean that your college will place a hold on such documents as transcripts until the exit counseling has been completed. These sessions of self-paced web counseling can be beneficial because you can learn about the repayment options available to you. You will also learn about the serious consequences of not making your loan payments.
Quitting School Early
There are a number of reasons why you might be unable to complete your schooling. However, if you received financial aid while you were in school, there are some important things to consider. You may be required to repay the funds that were disbursed to you, depending on the reason and timing of your departure.
This money was awarded to you for your educational expenses. So when you quit school, it is expected the money will be returned, even if you do not qualify for a refund from your college. It is also your responsibility to understand the rules and regulations regarding the tuition refund policy at your institution and any policies regarding grants, scholarships, and loans you may have received.
Beginning Repayment on a Student Loan
There are many benefits to using student loans; among the most notable is the fact that your repayments won’t begin until after you leave school. On a federally subsidized loan for which the first disbursement is made on or after July 1, 2012, and before July 1, 2014, students will be responsible for the interest that accrues on the loan during the grace period. If a student does not pay the interest accrued, the interest will be capitalized to the principal amount of their loan when the grace period ends. After leaving school or dropping below a half-time status, you have a six-month grace period on your Stafford Loans and nine months before you have to begin repayment on a Perkins Loan. Some loans, such as the PLUS loan that is available only to the parents of a student, most often do not qualify for a grace period. Parents typically have to begin repayment soon after the funds have been disbursed. Private student loans have a variety of repayment options; most allow you to defer payments while you are in school but the grace periods following your departure or graduation can vary.
Knowing Your Expected Income After College
When you pay for your graduate education with student loans, you may want to carefully consider how much money you really need each year. Every time you receive a student loan disbursement, that amount is tacked on to the student loans that you already have accumulated. At the end, your total amount of student loan debt could be quite high. Unless you plan to enter a field that will provide a large enough salary to meet your monthly obligations, your student loan payments could take up a considerable portion of your monthly budget. Be sure to track the amount you are borrowing each year, know what the monthly payments will be, and compare them to your expected income after college. This will help you stay on top of your student loan debt and keep it to a manageable amount.
One of the many responsibilities you have after leaving college is to stay in contact with your student loan servicing agency or lending company. It is important that they have your current contact information so they can reach you regarding your student loan repayment. Without current information, your billing statements could be delayed. Remember: even if you don’t receive a bill because your loan servicer cannot reach you, your payment is still due on time. In addition, if you decide to switch schools, you need to let your lender(s) know. If you don’t contact your lender to notify them of your new contact information or your in-school status, you might be required to begin repaying your loan.
Choosing a Plan to Repay Your Student Loan
With federal student loans, and with many private student loans, you can choose your repayment plan, which can be influenced by how much you can actually afford to pay. The option most familiar to most borrowers is the Standard Plan, which requires equal payments over a 10-year period. With an Extended Plan, you also make equal payments each month, but repayment can take up to 25 years (if you consolidate it could be up to 30). Similarly, with a Graduated Plan, payments can also be spread out over 25 years. However, with that plan your payments will start out low and gradually increase at regular intervals. Another repayment option is the Income Contingent Plan. Using your current income information, a monthly payment is calculated that should be affordable for you. The term on this loan repayment plan can be extended to 25 years. Any balance remaining after that 25 year period will be discharged. The final option is the Income Based Repayment Plan which is intended to help those who have a high debt level compared to their income. It was created to help people who have a difficult time making their student loan payments in a typical 10-year repayment plan. Make sure to ask your student loan provider about each of these options to find the one that is right for you.
Taking the option of deferring your student loan payments may help you in some situations when money is tight, for example, if you decide to go back to school. If you enroll in a qualified program at a higher education institution and attend at least on a half-time basis, then you could apply through your loan servicing agency for a deferment. If your situation is approved, not only are your payments postponed, but the interest on a subsidized Stafford Loan does not accrue during the period (for unsubsidized Stafford Loans and private loans, the interest would still accrue).
Getting a Student Loan Forbearance in an Emergency
When you are facing an emergency financial situation, you may be able to request a student loan forbearance. This is an option when you don’t meet the qualifications for a student loan deferment but need to temporarily postpone making payments on your student loan. You will be required to provide your student loan servicing agency with documented proof that you are unable to meet your required payments. Depending on your situation, this option may help you for up to 12 months. If the situation continues, your loan servicing agency may review your case and renew the forbearance for up to three years. One disadvantage is that the interest on your student loan will continue to accrue during the forbearance period.
It’s not a pleasant thought, but take heart: there is no need for you to worry about the impact your federal student loans will have on your family if you should die. (Note: this is not always true with private student loans. If you have a private student loan that required a cosigner, your cosigner might be responsible for repayment.) In this case, your federal student loans are completely discharged and no debt will be passed on with your estate. Your family will need to follow a few steps for this to happen, including sending a copy of your death certificate to the student loan servicing agency. Likewise, if you should find yourself afflicted with a permanent disability, you can also begin the process to have your student loans discharged. You will need to supply medical documentation regarding your disability.
Does Your Student Loan Qualify for Forgiveness?
Some students are surprised to realize that not completing your degree or having difficulty finding employment after graduation does not meet the qualifications for loan forgiveness. The federal government created the Public Service Loan Forgiveness Program to help borrowers who work full-time in public service jobs repay eligible federal Direct Loans. Borrowers qualify for forgiveness of the remaining balance due after making 120 payments on loans while employed full-time by certain public service employers. The qualifying 120 payments must be made in one or more of the following federal repayment plans:
- Income Based Repayment (IBR) Plan
- Income Contingent Repayment Plan
- Standard Repayment Plan with a 10-year repayment period
Consult with your financial aid office or Department of Education for more specifics on this program.