Student loan repayment strategies
Repaying Student Loans
When it comes time to repay your student loans, there are many factors to consider before you begin.
What type of student loans do you have? You may have federal loans, private loans, or a combination of both. The most common types of federal loans are Direct loans, previous Stafford (formally GSL loans, and now called "Direct" loans) and Perkins. Direct (and former Stafford) loans are either subsidized (need based) - where the government pays the interest while you are in school or in a period of deferment, or unsubsidized - where you are responsible for the interest from the moment the loan is granted. If your loan is unsubsidized, you have the option to pay the interest as it accrues, which will save you money long-term, or wait until the loan comes due and the interest will be capitalized. Perkins loans are always subsidized, while private loans are not. PLUS loans are made directly to parents for their dependent children's education, and HEAL loans for healthcare students are both federal and unsubsidized. There are many other federal and private loans available that are specific to the student's area of study, and many states have their own student loan programs for education and health programs.
Who is currently holding your loans? If you have current federal loans, chances are they are not with the original lender, but have been sold on the secondary market. If you have current private loans, they are likely held by the original lender. Perkins loans, however, may still be with the school that issued them or with a servicer, who is hired to collect payments. If your federal loans are in default, they may be with a guarantee agency (a state or private insurance company that pays the loan if you default), a collection agency, or the Department of Education. If your loans are older than ten years since they first became due, they will most likely be held by the Department of Education and serviced by a collection agency. For defaulted private student loans, contact your original lender, and for loans made from university funds, your school may still have them. Another way to determine who now holds your loans is to check your current credit report.
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.
If you can't pay
There are several options you may want to explore if you find you cannot pay your student loans:
Deferment - You may be able to temporarily postpone payments on your loan with a deferment. If your loans are subsidized the interest will be also be suspended; if not, interest will continue to accrue. Deferments are only accepted under certain circumstances: if you are a full or half time student, have a temporary total disability, are unemployed, have economic hardship, are enrolled in a rehabilitation program for the disabled, or are a parent with young children.
Forbearance - If you don't qualify for a deferment, you may be able to postpone or temporally reduce your payments with a forbearance. Forbearance is less attractive than deferment, because whatever the type of loan, interest will continue to accrue.
Cancellation - The circumstances in which a loan may be canceled in full include: death of the borrower, permanent total disability, and attendance at a trade school where you were either falsely certified or the school closed before you could complete the program. Some loans may be partially canceled if you are a member in a uniformed service, teach or provide services to needy populations, work in health care professions, or work in law enforcement. Check with your school or lender for details about cancellation.
Bankruptcy - Student loans are extremely difficult to discharge in a Chapter 7 bankruptcy. You must prove undue hardship, and they are rarely accepted. However, you may include your student loans in a Chapter 13 bankruptcy, a reorganization of debt. Though student loans must be repaid in full, interest and collection costs cease, and collection action such as wage garnishment ends the moment you file.
Are your loans current or in default?
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 up to 10% 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 - they can be as high as 43%, but are more typically 25%. 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 your loans come out of default and the notation removed from your credit report. You have the right to be treated fairly during the collection process. Anyone collecting for student loans must comply with the Fair Debt Collection Act. Violators may be fined up to $1,000 per infraction.
Useful Phone Numbers
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