For students about to graduate, the specter of loan repayment and accrued interest can be terrifying.
Oh yeah, I have loans
For students about to graduate, the specter of loan repayment and accrued interest can be terrifying. Economic conditions do not assuage our fears; it may be difficult to find full-time employment in our areas of expertise within the six-month grace period allotted to us before loan payments begin.
The good news is that loan repayment does not have to be a stressful experience. There are various pathways for repayment and even a few ways to have outstanding debt canceled altogether.
Seek professional advice
Federal law requires that each student who holds an educational loan be assigned a personal loan servicer. This agency, often a bank, assigns your loan a person who can advise you on the most advantageous ways to pay off your school loan.
After July 2010, the federal government canceled the Federal Family Education Loan program and created the Direct Loan Program: subsidized and unsubsidized Stafford loans and PLUS loans.
Students who hold a FFEL loan have different repayment options than those students who have received funding since summer 2010. Perkins Loans do not fall into either category and have entirely different repayment plans.
Take advantage of grace periods
All Stafford loans have six-month grace period; unsubsidized loans are charged interest during this time, subsidized loans are not.
All PLUS loans are charged immediately after enrollment drops below full-time, except for graduate students who will have a six-month grace period.
Federal Perkins loan: nine-month grace period to begin repayment, during which neither principal nor interest are charged.
Be aware of your repayment options
Direct Stafford loans and PLUS loans have the same repayment options. Debt holders may choose from five different payment plans, and should speak with a loan specialist to establish a plan that works best for their individual situation.
Know your options for when you can’t make payments
Loans may be deferred for a return to school, unemployment, economic hardship or military service. During this time, the payments are postponed and the federal government pays interest on subsidized loans. Economic hardship means that the borrower may be receiving public welfare assistance, or bringing home an annual income that is less than 150 percent of the established poverty guideline.
For borrowers who need to pause or reduce their payments but do not qualify for deferment, forbearance is the next best option. Forbearance is for those experiencing financial hardship or illness, or who have are serving residencies in medical programs or Americorps. The postponement period is predetermined and interest on all loans is charged but not expected to be paid during the period of forbearance.
Interest payment tax credit
In 2010, the senate finance committee passed a tax relief act with various provisions. One that is particularly important for students is the interest paid tax deduction, for students who are paying interest on school loans. Eligible graduates make less than $55,000 a year or $110,000 if filing jointly, and may deduct up to $2,500 worth of interest payments each year through 2012.
Investigate opportunities to reduce your loan principal or interest
Graduates holding loans may receive a 0.25 percent discount for enrolling electronic payments every month if they set up this repayment option before repayment begins.
Consolidation allows borrowers to combine loans into one monthly payment at a fixed interest rate, the weighted average of the interest rates of the loans. This interest rate is capped at 8.25 percent. There are benefits and costs associated with consolidating, and everyone’s situation will be different so borrowers should speak with a loan specialist.
Graduates working in certain public service positions are eligible for loan cancellation under the Public Service Loan Forgiveness Program. Eligible full-time employees of “public service organizations” may work in:
- State, local or federal governments
- Peace Corp or Americorps
- Certain non-profit organizations
- Tribal college or university
- Public health services
- Public library or school
Program stipulations state that eligible students should have made 120 payments on Direct loans through the standard, income-based and income-contingent payment plans. ?
For more information or to contact a loan specialist, visit one of the sites below: