Tis the Season… for Student Loan Payments to Start

Saving for CollegeIt may be Thanksgiving month to many of us, but to May college grads, it’s also the month their student loan payments start.  Got questions about how to pay them back?  We have some answers.

I’m out of school; now what do I do with all of these loans?

Each year a student borrows money, a new loan is created, and each type of loan is created separately as well (the Master Promissory Note is only required once however). Between Subsidized Stafford loans, Unsubsidized Staffords, Perkins, and Parent PLUS loans, it is possible then to have quite a collection of loans upon graduation. If keeping track of the lenders and payments becomes difficult, you may wish to consolidate your loans into one loan. The interest rate on consolidation loans is the weighted average of the loans you are consolidating, but cannot exceed 8.25 percent. Subsidized loans that are consolidated retain their subsidized benefits.

Do I have to pay it back all at once?

Most student loans allow you to spread payments out more than 10 years, and there are several options for payment plans. The Standard Repayment Plan — the most common — requires up to 120 equal payments of at least $50 a month. If you don’t consolidate, each loan will have its own payment plan. There are no prepayment penalties for paying off the loan early. If those payments are too difficult, you may choose the Extended Repayment Plan, which can give you up to 25 years to pay and a lot more interest. You are eligible for this plan if you have at least $30,000 in Direct Loans (loans made through the government), and/or $30,000 in Federal Family Education Loans. Note that while loans are no longer being made through FFEL, you may have an older loan through the program. Another option is the Graduated Repayment Plan, which allows you to make smaller payments early in the loan, graduating into higher payments later (but never more than three times any other payment), when your income will be presumably higher.

But I don’t have a ‘real’ job yet; how can I afford even this?

The Income Based Repayment plan may be for you. With this program, your income, family size, location, and amount of loans determine how Free College Pathology Student Sleeping Creative Commonsmuch you are able to pay. If the standard 10-year payment amount would take more than 15 percent of the amount you earn more than 150 percent of the poverty level, you may be eligible for lower payments based on that income. If your income is less than 150 percent of the poverty level, the payment would be zero, and otherwise, would be capped at 15 percent of the amount over that amount. As you earn more, the payment would rise. The IBR is only available for federal loans like the Stafford or Perkins, and not for Parent PLUS loans or private loans.

Note that the payment amount allowed may not be enough to cover your interest, which in most cases will increase the balance. For Subsidized Stafford loans, the government will pick up the additional interest not covered by your payment for up to three years. You will need to submit documentation each year to prove your continued eligibility, and if you are still in the program after 25 years, your remaining balance will be forgiven. The Income Contingent Repayment plan is a similar program, for direct loans only, which bases your monthly payments on your adjusted gross income and is recalculated each year.

If the financial hardship of repayment is too great, whether from continued unemployment after graduation or other financial difficulties, you may qualify for loan deferment or forbearance to postpone your payments. An unemployment deferment, for loans made since 1993, can last up to three years, for six-month periods at a time. You will need to prove that you are actively seeking work, by registering with an employment agency for example, or providing evidence of unemployment benefits. Deferments are also available for economic hardship, joining the Peace Corps, or being on active military duty during a war or national emergency, among other reasons. Interest will still accrue during periods of deferment. If you don’t meet the requirements for deferment, you may apply for forbearance, which can reduce or postpone your payments. For any of these options, contact your loan servicer, and don’t stop your payments until you are approved.

Isn’t there any way to get out of my loan?

Photo Credit: Alan Cleaver via Compfight ccThere actually are a couple of ways. Loans may be discharged due to the death or total and permanent disability of the borrower, and while not common, in certain cases bankruptcy can discharge a student loan debt. If you are a teacher and opt to work in a designated low income school or in a field with a teacher shortage, your Perkins loan debt may be forgiven, and a portion of your Stafford loan. Public service employees may also be eligible for loan cancellation. The Public Service Employees Loan Forgiveness program provides for loan cancellation of any balance remaining after 120 payments for borrowers working for certain public service entities (such as a school, military, hospital or law enforcement agency). There are specific requirements to meet, so if you are considering public employment, refer to www.studentaid.ed.gov for more details on this program.

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