Paying Back Student Loans
Student loans must be repaid at certain times and to the right loan servicers, but borrowers having trouble making payments have options.
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You just graduated college, so congratulations are in order and so is a big warm welcome to adult life.
First order of business? Pay your bills!
That diploma wasn’t free and if you’re like 73% of the other 2017 graduates, you have student loan debt and need to figure out how it back.
The good news is that you have choices. There are several student loan repayment plans to choose from. Some are based on a percentage of discretionary income, run for 20-25 years and may include loan forgiveness if all payments are made on time. Other start with low payments that increase over time as your income increases.
Regardless of which plan you choose, make sure you know who your loan-holder is, where to send payments and how much to pay. You may also have questions about discharging your loans or the consequences of missed payments. Get answers to your concerns before you fall behind, and join the 4.2 million borrowers who were in default at the end of 2016.
When must I begin repaying my student loans? Do I have a grace period?
Most student loans have a six-month grace period, which means you won’t have to start making payments until six months after you graduate, drop out or drop below half-time status. The grace period is meant to give you a chance to find a job and begin earning an income before you’re swamped with bills.
Tips to prepare for student loan payments:
- Use the grace period to research student loan repayment options
- Create a budget built around your student loans
- Prioritize paying off student loans
- Communicate with your loan servicer
- Set up automatic payments to avoid late fees
- Avoid student loan default at all cost
- Know the exact date when you expect to pay off the loan and give yourself a target ahead of that to shoot for
The following types of loans have six-month grace periods:
- Direct Subsidized/Unsubsidized Loans
- Subsidized/Unsubsidized Federal Stafford Loans
- Some private student loans
PLUS loans have no grace period, and you must begin repaying them as soon as they are fully disbursed.
The grace period on Federal Perkins Loans depends on the school that gave you the loan. If you have this type of loan, check with your school to find out when you must begin repayment.
The grace period on a private student loan depends on the lender and your loan contract. Most private student loans have a short grace period, but you must check with your lender to make sure.
You may also choose to consolidate your student loans during the grace period. This will group your federal student loans into one payment and simplify matters considerably.
If you have federal student loans, you can choose to consolidate them with the department of education, through your loan servicer, or consolidate with a private lender. Private lenders offer lower interest rates, but only to those with high credit scores. If you have good credit and are looking to lower your interest rates on medical school loans, for example, working with a private lender may be the best option.
How much do I pay each month? Can I pay more?
Your minimum monthly payment is based on the type of loan, the amount you owe, the length of your repayment plan and your interest rate. You’ll typically have 10 to 25 years to repay federal loans entirely. Shorter lengths of repayment time or larger loans will result in higher monthly payments.
The Standard 10-year Repayment Plan is by far the most popular plan with 11.37 million borrowers enrolled in 2017, but that doesn’t mean it is the best plan for you. This is the default plan. Borrowers are automatically enrolled in the Standard Repayment Plan unless they choose a different one.
You’ll make fixed monthly payments for 10 years. It’s a great plan if you can afford the monthly payments and the cheapest option long term because you’ll pay a lot less interest. But, if you don’t have the income to support these payments, you should enroll in one of the income-driving repayment plans.
As for making additional payments, you can always pay any amount more than the minimum payment each month. There are no penalties for early repayment, and taking this approach can save you a significant amount of interest over time.
How do I make payments?
Once bills are due, you’ll be responsible for sending your monthly payments to the companies that hold your loans.
If you don’t know where to send a payment, check with your school’s financial aid office. The financial aid office will be able to tell you who your loan servicers are. You can then contact your loan servicers directly with specific questions.
You can also retrieve loan information via the National Student Loan Data System.
Be aware that your payments are due even if you don’t receive the bills. If you move after graduation, tell your loan servicer your new address to ensure that you receive bills and can stay on top of your payments.
Consider changing your loan due date to make budgeting easier. The student loan payment might be due before you receive your paycheck each month. Contact your loan servicer to see if they can switch your payment date to directly after you get paid.
What are my options when I’m having trouble meeting minimum loan payments?
If your monthly required payment is more than your income allows you to pay, you may be eligible for income-driven repayment plans like the Income-Based Repayment Plan (IBR); Income-Contingent Repayment Plan (ICR); or Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).
The income-driven repayment plans are based on your income rather than the amount you owe, thereby lowering payment requirements for low-income borrowers. Generally speaking, these plan take into account your income, family size and state where you live. You pay between 10% and 20% of your discretionary income and plans run 20-25 years, depending on which program you choose.
If you expect your financial difficulty to be short term, such as if you are in between jobs or are on medical leave, you can temporarily suspend payments on federal student loans. However, your loans will continue to accrue interest, meaning you will owe more when you resume payments.
You may also be able to extend the time you have to repay federal loans by using an extended repayment plan.
Or, if you expect your earning power to increase significantly over the years, you can opt for a graduated repayment plan. This allows you to pay less at first, with monthly payments increasing over time.
What are the consequences of missed payments? Defaulting?
Student loans never disappear. There’s no statute of limitations, and student loans are rarely discharged even in bankruptcy. With few exceptions, your student loans will follow you through life, until you pay them off.
If you make a late payment on a federal student loan, you may be responsible for a late fee of 6% of the payment.
Defaulting on federal student loans will result in more severe penalties. You are considered delinquent when you haven’t made a payment in 90 days. When you haven’t made a payment in 270 days (nine months), you go into default and suffer a lot of consequences for it.
The government can garnish up to 15% of your wages and Social Security benefits, as well as offset income tax refunds. The government may also deduct 25% of each payment for collection fees, making the loan cost significantly more.
Late or missed payments will also show up on your credit report and can harm your score.
If you cannot afford your payments, it is much better to contact your loan servicer and review your repayment options rather than simply not paying.
Can I cancel my student loans?
Federal student loans may be canceled under the following circumstances:
- Your college closed down while you were a student there or within 90 days after you withdrew.
- Your school owed you or your lender a refund after you withdrew but never provided it.
- The loan was a result of identity theft.
- The student borrower dies.
- You become totally and permanently disabled.
Can my loans be forgiven?
Federal student loans may be eligible for certain forgiveness programs depending on your profession.
If you have an IBR plan, any balance remaining after 10 years will be forgiven if you spend those years in a public service sector such as the military, public education or police work.
You can have up to $17,500 in loans forgiven if you teach in a low-income area for five years.
If you ever find yourself struggling with student loans, keep in mind that you always have options. Don’t wait until you’ve missed several payments or have already defaulted on your loans; get help as soon as possible to create a plan that works for you and your budget.
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- Federal Student Aid (2017) Federal Student Loan Portfolio. Retrieved from https://studentaid.ed.gov/sa/about/data-center/student/portfolio
- NA, ND. If your federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven repayment plan. Retrieved from https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven
- NA, ND. Income Based Repayment Plan. Retrieved from https://www.studentdebtrelief.us/repayment-plans/income-based-repayment-plan/
- Fastweb. (2010). Repaying Student Loans: Quick Reference Guide. Retrieved from http://www.finaid.org/loans/RepayingStudentLoans.pdf
- Federal Student Aid. (n.d.). Repay Your Loans: Understanding Repayment. Retrieved December 11, 2012, from http://www.studentaid.ed.gov/repay-loans/understand
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