Keeping Your Student Loans In Check

By Terry Savage | June 07, 2011 AAA

The average graduate this year has $24,000 in loans - but many have $75,000 or more. There's really no way to escape your student loans; they can't be discharged in bankruptcy, and if you default, the government will eventually take its money from your Social Security check. So don't procrastinate - remember, it is your responsibility to stay in contact with your student-loan servicing agency or lending company. When you move, keep your address current because even if you don't receive a bill, your loan payment is due on time.

TUTORIAL: Student Loans

And don't even think of leaving campus until you've had a meeting at the financial aid office. This "exit counseling" for Federal student loans is a requirement, and failure to go through the process could hold up your diploma or transcripts. Plus, defaults on student loans will have a big impact on your credit report. So it's worth paying attention so you don't have to pay forever!

Here are some other things to think about as you deal with your student loans after graduation.

Track Your Loans
The "exit counseling" process is designed to help you keep track of all your student loans, except for private loans and PLUS loans taken out by your parents. If you haven't kept track of your student loans, you can go to the National Student Loan Data System at www.nslds.ed.gov.

Check the Grace Period
After leaving school (or dropping below half-time status) you have a six-month grace period on Stafford Loans and nine months on Perkins Loans. Individual private loans may have different repayment start times. Remind your parents that PLUS loans typically do not qualify for a grace period. Never go beyond the grace period. For more, see Get A Free Ride From Credit Companies.)

Understand the Interest Rates
Current student loans carry fixed interest rates. But if you have Federal student loans taken out before 2010 (under the FFEL program, where private lenders disbursed the loans), you may get a break on interest rates by agreeing to automatic monthly deductions. Or you may get a lower rate after completing several years of on-time payments.

Understand Repayment Options
There are two basic repayment plans-the standard ten-year plan, and a stretch plan that allows you to make payments over 30 years. If you take the latter route, you can choose a fixed payment every month, or graduated payments that start low and increase every two years.

Do the Math
Remember, the longer you take to repay the loan, the more interest you will pay over the years. That can really add up. Check the calculators at www.SimpleTuition.com to see how much more it will cost to stretch out your repayment period. (For more, see Digging Out Of Personal Debt.)

Income-Based Repayment Plan
Recognizing the burden of student loans, starting in 2009 the government created the income-based repayment plan. Using your current income information, an affordable monthly payment is created. This program can be used for 25 years, and at the end of that time any remaining balance is discharged, if you have kept up with your payments.

Defer a Student Loan
One other possibility is deferring your student loans. This is often allowed when you go back to school on at least a half-time basis, or go on to graduate school. But interest keeps accruing, unless it is a subsidized Stafford loan. (For more, see Student Loan Deferment: Live To Pay Another Day.)

Forbearance on Student Loans
Proving that they're not completely hard-hearted, the government may allow you to temporarily postpone payments on your student loan. That will require documented proof of unemployment, or some other qualifying circumstance. A deferment can be for up to 12 months, and may even be extended. But interest continues to accrue.

TUTORIAL: Student Loans: Federal Loans

Forgiveness?
Well, that's the most unlikely solution to your repayment problem. Simply being unemployed will not qualify you for forgiveness. But you can contact your lender or loan servicing agency if you truly have a sad story to tell.

Remember, a loan that is late by even one day can cost you a discount for on-time payment. If you are 21 days late, a loan goes into delinquency, and you can expect a collection notice if you are a month late. Two months delay will be a delinquency that is reported to the credit bureaus. After 270 days, the loan is considered in default and the borrower is subject to wage garnishment and other penalties. (For more, see No Debt Forgiveness For The Tax Man.)

The Bottom Line
Your best bet in dealing with student loans is to be proactive. Go to www.FinAid.org and use the repayment calculators to figure out how much your monthly payment will be under the standard, ten-year repayment plan. That's the place to start if you know you will have an income.

Set up an automatic monthly payment, so you can get the loan behind you before your consider buying a home or starting a family. That's the sensible thing to do. And that's The Savage Truth. (For more, see Student Debt: Is Bankruptcy The Answer?)

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