Your Options for Repaying Student Loans
Student loan debt can be the first major debt you acquire. You were probably quite young when you took out the loans. You may not have paid much attention to the details of the financial commitments you made, focusing more on the money you were receiving than the obligations that would fall on you years later.
Eventually, the time comes when you must begin repaying the debt. Remember, it is important to make timely payments on your student loan debt, as your payment record will appear on your credit report.
Almost every student loan comes with a grace period. A grace period is the time when you are not required to make any payments. Most loans do not require any payment while you are in school. The grace period ends a certain number of months after you graduate, drop out of school, or your enrollment at school drops to half-time enrollment. Grace periods usually run six to nine months after you finish or cease your schooling, depending on the kind of loan you have. Not every loan has a grace period after graduation or cessation of school, so it is your responsibility to know when your payment obligations begin.
Federally subsidized loans do not accrue interest during the grace period, but non-subsidized loans start accruing interest from the time the funds are disbursed to you.
Once your grace period ends, you are required to begin payments. The amount you pay each month will depend on your total debt, the interest rate you agreed to, and the length of time that you are given to pay off the debt. Different types of loan programs come with different repayment terms. So, be a wise consumer and be aware of what kind of loan you are taking out.
If You Can Afford to Pay
To save yourself as much money as possible, look at a few options before you begin repayment. These options are not available only when you first start repayment, but you can review them at any time.
- Student Loan Consolidation: Look into consolidating your student loans. Consolidating your student loans can help you lower your monthly payment and lock in an interest rate. This will protect from a potential rise in rates which could affect your payment greatly.
- Accelerating Payment: Most student loans have no pre-payment penalties. If you can afford to make a larger payment than is required, the extra amount you send in will be applied directly to your principal balance. This will save you money by reducing your long term finance charges.
If You Cannot Afford to Pay
When you are in a financial hardship and unable to pay as agreed, there may be different options available, depending on the loan you have and the lender you owe. Look into all options that will prevent your loan from going into default status.
- Forbearance: Forbearance programs allow you to postpone your payment for a set period of time, generally for a maximum of up to one year. Interest usually continues to accrue during your forbearance. You may qualify for forbearance on your federal student loans for a number of reasons. These include: medical hardship, unforeseen personal problems, a demonstrated inability to repay the loan within the timeframe agreed to, and proving that the monthly payments will exceed 20% of your monthly income. Only your lender can grant you forbearance. Speak directly with your lender and explain your situation. If your lender feels your case has merit, you will need to fill out forms in order to receive formal approval for forbearance.
- Extended Repayment Plan: Extended repayment plans allow you to stretch out the repayment term on your loan. Some times, the repayment term can be extended to as long as 30 years. The longer you extend your payment, even if it lowers your monthly payment, the higher your total costs will be on the loan.
- Income Contingent Payment: Income contingent plans examine your monthly income and how much you owe in total student loan debt. Each year, your income is re-examined, to see if you can afford to increase your payment. Payment terms on an income contingent payment plan can be extended to 25 years. Any balance that remains after 25 years is forgiven. Any debt that is forgiven will result in a 1099 being issued for forgiveness of debt, which can result in an income tax obligation.
- Income Based Payment: IBR is a repayment plan for many types of federal student loans that caps the size of the monthly payment, based on the borrower's income and family size. Old loans or new loans can be included in an IBR plan. It does not matter for what type of education you took out the loan, whether it was for undergraduate, graduate, professional, or job training.
If you simply stop making payments or never begin to make them when they were required, your loan will go into default. Do everything that you can to avoid this, as there are serious consequences for defaulting.
A federal student loan is considered in default after 270 days of non-payment. The federal government has the right to garnish your wages and seize any tax refund you would otherwise receive. The Department of Education can garnish 15% of your after-tax income, as long as the garnishment does not bring your weekly pay below 30 times the Federal hourly minimum wage. Unlike other creditors, the federal government has the right to garnish wages, levy bank accounts, and seize property without first obtaining a court judgment against the debtor.
To try to stop a garnishment on a federal student loan, consult the Department of Education's resource Default and Collections. The DOE provides a list of resources available for consumers who have defaulted on their loans.
If you have a private student loan, the rules are different. Private lenders must file a lawsuit against you and obtain a judgment, before they can garnish your wages. Therefore, it takes private student loan lenders longer to begin a garnishment than for the Dept. of Education. Depending on where you live, private lenders with a judgment against you could garnish as much as 25% of your after-tax wages. The amount that can be garnished is specific to your state, so you need to look into your state laws on garnishment to determine how much of your pay can be garnished by private lenders.
Student Loan Forgiveness
Several federal and state agencies offer programs to help you cancel or reduce all or a portion of your student loan debt without filing for bankruptcy. Most programs involve teaching, nursing, or military service. To learn more about available programs and how you can apply, visit the Federal Student Aid Repayment Information Web site.
There are certain times where a student loan can be significantly reduced, though these options are limited. If you are disabled and are paying a federal student loan, see the Bills.com resources Student Loan Disability and Federal Student Loan Tuition Waiver. If you work in public service and have federal student loans, read Public Service Loan Forgiveness to learn how to have your student loans waived.
It is not easy to include student loan debt in a Chapter 7 bankruptcy that discharges your debt obligations. To include it, you need to prove an extreme financial hardship. Essentially, you must prove to the court’s satisfaction that there is no reasonable expectation that you will be able to repay the debt during the entire term of the loan. Student loan debt can be included in a Chapter 13 bankruptcy, which reorganizes your debt. Anytime that you are under the supervision of the bankruptcy court, all garnishments against you are suspended.
Student loans can assist you greatly. They may be the only way that you can afford to finance your education and achieve the career goals that you set for yourself. Read the terms of the loan, before you borrow the money, so you fully understand your financial obligations. Try to take out loans only when necessary. Remember, student loans are not free money. They must be repaid. Pay on them responsibly and your credit rating will receive a boost. Neglect to pay on them and you can suffer harm to your credit and aggressive collection efforts.