Repaying Student Loans
Borrowing to pay for college has become a requirement for most of today’s students.
So, whether you are a senior about to get your first job offer, a graduate student finishing up your JD, or a freshman just entering the fray, you need to be sure you understand how – and how not – to responsibly repay your debt.
Go Back to the Beginning: Promissory Notes
Way back when you first accepted your student loan, you signed a promissory note. This legally binding document details your rights and repayment responsibilities for each and every loan. If you haven’t already done so, start preparing to repay your student loans by reading your promissory notes.
Remember: repaying the loan according to the terms outlined in your note is your responsibility – regardless of whether you completed your degree, were fired from your job, or got married or divorced.
Lay the Foundation: Establish a Budget
The surest way to ensure that you have enough money to cover your monthly loan payment is to create an expense budget. Start by determining your take-home pay after taxes and retirement savings. Then plug in expenses like housing, transportation, food, entertainment, and of course, your loan payment.
Your promissory note outlines the terms of your repayment, so there should be no guesswork involved. Cars, clothes, and even cable are luxury expenses. But repayment of your loan is not optional. Be sure that your priorities are clear, because failure to repay your student loan will trash your credit rating and force lenders to garner your wages.
Prepare to Pay: The Grace Period
Your loan’s grace period is the last stop before your final destination: loan repayment.
As you probably already know, the repayment and interest accrual of your Stafford and Perkins loans are deferred while you attended school with at least part-time status.
However, as soon as you complete your degree, leave school or reduce your course load to less than part-time status, you enter your loan’s grace period. During the grace period, you will have a few more months to get yourself settled, find a job and establish your budget.
If your loan is subsidized, interest accrual as well as payments will continue to be deferred during the grace period. If you have an unsubsidized Stafford Loan, your interest will begin to accrue, but your payments will be deferred.
With a Stafford Loan, you have a 6-month grace period; the Perkins Loan gives you a 9-month reprieve. In either case, you are not required to take advantage of this grace period. So if you can afford to begin repaying immediately, do so. The faster you repay, the less your loans cost you in interest.
Do the Math: Determining Your Repayment Plan
Government guaranteed student loans traditionally offer three types of repayment plans: the 10-year plan, the 30-year plan and the graduated plan.
The 10-year plan is the least expensive repayment option over the long-term, since it keeps your interest costs down. However, in the short-term, a 10-year plan means relatively higher monthly payments, which you may find difficult to meet on the salary of your first job.
If after reconfiguring your budget, you still cannot afford the 10-year plan payments, consider a 30-year plan. This extended plan will significantly reduce your monthly payment – perhaps by half or more. However, it will also dramatically increase the lifetime cost of your loan. In fact, the interest portion of your total loan cost can be up ten times higher than on the 10-year plan.
A hybrid option is the graduated plan, which allows you to pay off your loan on a sliding scale over a period of up to 30 years. When you’re just starting out and your income is still small, your monthly payments will be low (although your relative interest costs will be high). As your income grows, your monthly payments will increase (and your relative interest costs will decrease). Remember that to maximize the saving value of the graduated plan, you must pay off your loan as soon as possible.
The Nuts and Bolts
Now that you have decided on the right repayment plan for your budget, you are ready to send off your first payment. Here, too, you have a few options.
Your lending institution will send you a coupon book, with pre-printed slips for every month.
Each month, you can send in a check with the corresponding month’s slip. Or you can set up an automatic withdrawal from your bank account.
Some lending institutions also permit you to pay by phone or on-line, by debit deduction from you checking account or by credit card. (Of course, if you cannot afford to pay off your credit card every month, then charging your student loan is like entering an interest quagmire.)
Remember that however you choose make your payment, the onus to do so is on you. Even if your lender fails to mail you your coupon booklet, you are still obligated to make your monthly payments. Therefore, be sure to update your lender immediately if your address, name or social security number has changed.
When In Need: Student Loan Deferment
During the lifetime of your loan repayment, you may find yourself in a situation that allows you to request a deferment from your monthly payment and interest accrual. These situations include, but are not limited to, enrolling in a higher education program (at least part-time) and encountering financial hardship caused by the loss of a job, loss of a spouse, etc.
If granted, your student loan deferment will be for a limited and pre-determined amount of time. Failure to resume repayment at the end of your deferment period will result in defaulting on your loan. For more information about deferment, contact your lending institution.
When All Else Fails: Student Loan Forbearance
If you find yourself in a dire financial situation and you do not qualify for a student loan deferment, you may inquire about student loan forbearance.
Forbearance means that your lender decides to reduce or suspend your monthly payments for a limited period of time, during which interest continues to accrue. The terms of your forbearance, which may last up to three years, will be reevaluated yearly. For more information, contact your lender directly.
Serve and Be Served: Student Loan Forgiveness
In addition to making monthly payments on your student loan, you may be entitled to student loan forgiveness.
There are two forms of student loan forgiveness: (1) the federal government may cancel all or part of your student loan debt in exchange for you serving your country as a soldier, teacher or volunteer, and (2) your employee, the state you work in, or the organization you volunteer for may absorb part or all of your student loan debt in exchange for working and/or volunteering in high-demand fields.
For example, if you volunteer for AmeriCorps, the Peace Corps or Volunteers in Service to America (VISTA), you can earn up to several thousand dollars in federal student loan forgiveness in exchange for a year of service.
Service in the Army National Guard or the US Armed Forces may also make you eligible for up to $10,000 or more in federal student loan forgiveness.
Full-time elementary or secondary school teachers serving special-needs students or students from low-income families may have up to 30 percent of their Perkins or Stafford loans forgiven. Likewise, physicians and attorneys in high-need areas may qualify for significant, state-sponsored student loan forgiveness.
Reduce and Simplify: Federal Student Loan Consolidation
Another way to reduce your monthly student loan payments is to refinance with a consolidation loan. A consolidation loan allows you to combine your existing variable-rate loans into one fixed-rate loan. Consolidating when interest rates are low may offer substantial savings in the lifetime costs of your loans.
A consolidated loan also lets you renegotiate the term of your loan, extending it up to thirty year. Consolidated loans are available either through the government (known as Direct Consolidation Loans) or through a private, outside lender (known as FFELP Consolidation Loans).