Time to repay student loans?

If you are one of the 40 million students in the United States saddled with student loan debt, it makes sense to know your options. You are definitely not alone, since student debt has climbed to a record high of more than $1.2 trillion, an 84 percent jump since the recession began in 2008.

Many graduates are finding that careful planning and self-discipline go a long way toward retiring their debt.

Know your loan
You must first completely understand your particular loan(s). Details about your lender, balance and status determine your options for repayment and, if possible, forgiveness. You can contact your school for help in locating your lenders and/or loan records if you can’t find them online or in your files.

It’s important to stay in touch with your lenders, both federal and private. If you move or change your phone number or email address, notify them right away. If their efforts to contact you fail, it could cost you a lot more money in the future.
Ignoring your student loan is perhaps the worst avenue to take, since it leads to delinquency and default. For federal loans, you are technically in default after nine months of missed payments. When this happens, your total loan becomes due, the amount soars, your credit score tanks, and the government can garnishee your wages and take your tax refunds! With private loans, it happens even quicker and any co-signers, perhaps your parents or grandparents, are put at risk.

Each loan has its own requirements. Upon graduation, you need to know the grace period before your first payment. Federal Stafford loans give you six months. Perkins loans give you nine. But for federal PLUS loans, it is based on the issue date. If you have private loans, it differs. Your lender will review this so you won’t miss that first payment.

Know your options
Federal loan payments are automatically based on a standard ten-year repayment. But don’t panic. If this is too hard on you, you should be able to change the plan at a later date. Keep in mind that extending your payment period will lower your monthly payment, but it will also increase the amount of interest you will pay.

Options to consider include the Income Based Repayment (IBR) and Pay As You Earn, which cap payments at a percentage of your discretionary income every year and forgive any debt after no more than 25 years of payments.
Keep in mind that your private loan is not eligible for Income Based Repayment or other federal loan plans, deferments or forgiveness. On the other hand, your private lender may be able to offer other options, typically with added fees. They may allow you to make interest-only payments for a while. You will need to read your loan paperwork carefully before you meet with your private lender.

Whatever you do, don’t worry. If you are having difficulty finding a job after graduation or you experience unforeseen financial situations, or perhaps a health issue crops up, there are ways to postpone your federal loan payments. These are deferments and forbearance. Just remember that if you choose deferment due to unemployment or some type of forbearance, interest may continue to accrue.

Forgiveness may be available after ten years if you work in the public or nonprofit arena. Public Service Loan Forgiveness is a federal program that forgives any student debt remaining after ten years of qualifying payments for people in government, nonprofit and other public service jobs. There are other federal loan forgiveness plans available for AmeriCorps and Peace Corps volunteers, teachers, nurses, state, school and private programs.

On the other hand, let’s assume you are making more money than expected in your job and can afford to pay more than the required monthly amount on your loan. This is perhaps the best way to lower the total amount you will pay over the life of your loan, since you are lowering the amount of interest due.

If you are lucky enough to be in a position of early payoff, consider paying off your loans that have the highest interest rates first. Private loans usually have higher interest rates than federal loans.

You could also check into a consolidation loan, which simply takes all of your student loans and rolls them into one, thereby creating one monthly payment. It’s not wise to consolidate your federal loans into a private loan because you may

lose any repayment options and borrower benefits such as unemployment deferments and loan forgiveness programs. You never know when you may need to take advantage of one of those plans.

Paying off your student loans won’t happen overnight, but with planning and foresight, your future will be more secure knowing you are on the right path to financial success. HLM

Sources: ibrinfo.org, nslds.ed.gov and studentloanborrowerassistance.org.