CESI Personal Finance Guide – Chapter 9: Student Debt

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Chapter 9: Student Debt

Student loan debt is many individuals’ next largest debt after their mortgage. As of 2014, total student loan debt in the United States exceeded $1.2 trillion, and Americans owe more on student loans than they do on credit cards. As the cost of a college education increases, it is expected that even more students will take out education loans, and many will be struggle with repaying these loans for much of their lives. A single missed payment can negatively impact your ability to obtain credit in the future, so it is extremely important to understand the terms of your loan. This chapter, compiled with information from StudentAid.gov, will help you do just that.

Making Payments

After you earn your degree or stop carrying at least half of a full course load, your federal student loan automatically enters a grace period. Check with your school to determine what constitutes half-time enrollment. The length of your loan’s grace period depends on the type of loan you have, as show in the table below, courtesy of asa.org.

Type of LoanGrace Period
Stafford6 months
Perkins9 months
Grad PLUS (disbursed on or after July 1, 2008)6 months
Grad PLUS (disbursed before July 1, 2008)None
Parent PLUS loans (disbursed on or after July 1, 2008)Borrowers can request a 6 month grace period
Parent PLUS loans (disbursed before July 1, 2008)None
Private Student LoansGrace period vary -- contact your lender

It is very important to start making payments as soon as your grace period ends to avoid a negative mark on your credit report. Additionally, student loans are nearly impossible to discharge in bankruptcy so it should be high on your list of debts to repay. Payments will be made to your loan servicer, who will periodically send you notifications throughout your time in school and during your grace period. You will automatically be enrolled in a standard repayment plan, but don’t worry if you can’t afford that amount – you have many options when it comes to repaying your student debt.

Repayment Plans

So what happens if you can’t afford the monthly payment on the standard repayment plan for your federal student loan? Fortunately, the federal government has provided you with several repayment options, but it can be tricky to wade through them all. The amount of each monthly payment and the length of time you pay vary depending on which option you choose. The table below, courtesy of studentaid.gov (2013) explains your repayment options.

Repayment PlanEligible LoansMonthly Payment & TimeframeQuick Comparison
Standard
  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • All PLUS loans
  • Payments are a fixed amount of at least $50 per month.The timeframe for this plan is up to 10 years.
  • You’ll pay less interest for your loan over time under this plan than you would under other plans.
Graduated
  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans

 

  • Payments are lower at first and then increase, usually every two years.The timeframe for this plan is up to 10 years.

 

  • You’ll pay more for your loan over time than under the 10-year standard plan.
Extended
  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans

 

  • Payments may be fixed or graduated.The timeframe for this plan is up to 25 years.

 

  • Your monthly payments would be lower than the 10-year standard plan.
  • If you are a:

  • Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans
  • FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans
  • For both programs, you must also be a “new borrower” as of Oct. 7, 1998
  • You’ll pay more for your loan over time than under the 10-year standard plan.
Income Based (IBR)
  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans made to students
  • Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents

 

  • Your maximum monthly payments will be 15 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).
  • Your payments change as your income changes. The timeframe for this plan is up to 25 years.

 

  • You must have a partial financial hardship.
  • Your monthly payments will be lower than payments under the 10-year standard plan.
  • You’ll pay more for your loan over time than you would under the 10-year standard plan.
  • If you have not repaid your loan in full after making the equivalent of 25 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven.
  • You may have to pay income tax on any amount that is forgiven.

 

Pay As You Earn (PAYE)
  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans made to students
  • Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents
  • Your maximum monthly payments will be 10 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).
  • Your payments change as your income changes. The timeframe for this plan is up to 20 years.
  • You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
  • You must have a partial financial hardship.
  • Your monthly payments will be lower than payments under the 10-year standard plan.
  • You’ll pay more for your loan over time than you would under the 10-year standard plan.
  • If you have not repaid your loan in full after you made the equivalent of 20 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven.
  • You may have to pay income tax on any amount that is forgiven.

 

Income Contingent (ICR)
  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans

 

  • Payments are calculated each year and are based on your adjusted gross income, family size, and the total amount of your Direct Loans.
  • Your payments change as your income changes.
  • The timeframe for this plan is up to 20 years.
  • You’ll pay more for your loan over time than under the 10-year standard plan.
  • If you do not repay your loan after making the equivalent of 25 years of qualifying monthly payments, the unpaid portion will be forgiven.
  • You may have to pay income tax on the amount that is forgiven.
Income Sensitive (ISR)
  • Subsidized and Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans
  • Your monthly payment is based on annual income.
  • Your payments change as your income changes.
  • The timeframe for this plan is up to 10 years.

 

  • You’ll pay more for your loan over time than you would under the 10-year standard plan.
  • Each lender’s formula for determining the monthly payment amount under this plan can vary.

 

 

Student Loan Consolidation

When you consolidate your loans, you centralize your payments into one monthly payment instead of making multiple payments per month to each of your servicers. Depending on your situation, it may or may not be the best option for you. There are several benefits and drawbacks to student loan consolidation.

The benefits of student loan consolidation include:

  • One lower monthly payment
  • Possible access to alternative repayment plans and forgiveness options
  • Loans can be consolidated even if you are in default
  • Consolidation may be a viable option for those who can’t afford payments on their loans even if on a low-income plan, aren’t eligible for low-income plans or postponement, don’t qualify for loan cancellation, or can afford payments but want to refinance at a lower rate

The drawbacks of student loan consolidation include:

  • You will increase repayment length, causing you to pay more in interest
  • You may lose some of the benefits offered by the original loan, including losing the grace period on loans that were not yet in repayment when consolidated
  • Most private loans are not eligible for consolidation

Deferment and Forbearance

Deferment

When you defer your federal student loans, you temporarily delay repayment of both the principal and interest. It is important to note that interest continues to accrue on some types of loans, except for those in which the government may pay the interest on the borrower’s behalf. These exceptions include Federal Perkins Loans, Direct Subsidized Loans, and Subsidized Stafford Loans.

Whether or not you are eligible for deferment depends on your situation. Deferments are commonly granted if you are:

  • In school at least half-time (again, check with your school to see what constitutes half-time enrollment)
  • Unemployed, but looking for work
  • Active Duty Military
  • Facing a financial hardship

If you are in a situation where you need to defer your federal student loan payments, contact your servicer as soon as possible. You will still need to continue to make payments until you have received notification that your deferment has been approved. Remember, should you miss payments, you risk negative marks on your credit report.

Forbearance

Forbearance is a temporary delay or reduction of payments of your federal student loans, depending on your circumstances. This is an option for those who are not eligible for deferment, but unlike with deferment, interest continues to accrue on all student loan types while in forbearance.

There are two types of forbearance for which you may be eligible. Discretionary Forbearances may be granted by the loan servicer if the borrower is experiencing financial hardship or illness. Mandatory Forbearances are required to be granted by the lender for special circumstances including the following:

  • Medical or dental internship or residency
  • Total monthly amount owed for all student loans exceeds 20% of monthly gross income
  • Performing teaching service that would qualify for teacher loan forgiveness
  • Activated member of the National Guard who does not qualify for deferment

Contact your loan servicer to apply for forbearance of your federal student loans. You will still need to continue to make payments until you have received notification that your forbearance has been approved.

Forgiveness, Cancellation, Discharge

Forgiveness

A benefit of certain types of employment is forgiveness of an individual’s federal student loans. There are two types of forgiveness programs: teacher and public service. The teacher loan forgiveness program has two separate maximums depending on the location and subject matter. The public service forgiveness program depends on your employment. Each program has specific eligibility requirements and application processes that can be found on the studentaid.gov website.

Cancellation and Discharge

In special circumstances you may be eligible for cancellation or discharge of all or a portion of your student loans, relieving you of repayment. In any case where you have had debt cancelled or discharged, including student loan debt, you will want to consult with a tax specialist regarding the tax implications of the amount cancelled or discharged.

Following is a list of some, but not all, reasons for cancellation or discharge of federal student debt:

  • Permanent and Total Disability Discharge
  • Death Discharge
  • Bankruptcy Discharge (please note that this is very rare)
  • Closed School Discharge
  • False Certification of Student Eligibility or Unauthorized Payment Discharge
  • Unpaid Refund Discharge
  • Perkins Loan Cancellation and Discharge

For more detailed information regarding eligibility for these programs, visit studentaid.gov or contact your loan servicer.

Understanding Default

Defaulting on a student loan means you have not made the required payments as scheduled in your loan agreement. Once you miss a single payment, your loan becomes delinquent. Your loan servicer is required to report the negative occurrence, which will cause damage to your credit report. After 270 days of non-payment, your loan officially goes into default. Defaulting on student loans has serious financial consequences including tax and wage garnishment. To avoid default, contact your loan servicer as soon as you are struggling with your payments to review your repayment options and develop an appropriate plan toward a current repayment status.

If you are already in default, there are two ways to change your status:

  • Rehabilitation. This is an opportunity for you to make affordable arrangements based on federal criteria to get your account to a current status for a specified amount of time. It is important to keep your end of the agreement, otherwise your loan will go back into default status. Upon completion of this program, your loan will be brought to current status and the default will be removed from your credit report.
  • Consolidation. By consolidating your loans without rehabilitating them, your loans will be updated as current once the process has been completed. By consolidating your loans, you may be eligible for more affordable repayment options and other forgiveness programs. However, the default will remain on your credit report for seven years.

Also note that you may process either of these programs only ONE time each. If you choose to consolidate your student loans out of default status, you will not have this option again; the same goes for the rehabilitation program. These restrictions make your attention to repaying your student loans very important.

Private Student Loans

So far, this chapter has almost exclusively discussed federal student loans. While private student loans may not have as many flexible options as federal loans, there are a few factors that can be considered to alleviate some of the stress. This section was put together with information provided by FinAid.org.

Refinancing

By refinancing your student loans, you will have the benefit of one monthly payment and perhaps better terms of your loan, including a lower interest rate. However, refinancing is based on specific credit criteria and your monthly income. Credit Unions are a good option for refinancing student loans and often offer better rates than many banks. Additionally, Credit Unions are known to be less strict with their credit guidelines than are most banks.

Repayment Options

Many banks and/or Credit Unions offer special repayment options to include an interest only payment. By making interest only payments, you will be making payments toward the interest on your student loan and may reduce your monthly payments allowing you the opportunity to repay your student loan each month while paying toward your interest.

Grace Period Extension

Many banks and/or Credit Unions offer special repayment options to include an interest only payment. By making interest only payments, you will be making payments toward the interest on your student loan and may reduce your monthly payments allowing you the opportunity to repay your student loan each month while paying toward your interest.

Forbearance

Private student loans have different forbearance options than federal loans, specifically the amount of time one can receive a forbearance. Forbearing your loan means you are not required to make loan payments for a specified and agreed upon timeframe. Remember, interest continues to accrue on the loan balance during this time. Forbearance options are only allowed for 12 months during the entire life of the loan. This means, with a twenty year repayment period, you are only entitled to receive 12 months of forbearance. Most lenders will only provide you with two months of forbearance at a time to ensure you do not run out of options later in your loan repayment period. Further, forbearances are only granted for specific reasons. Contact your private student loan servicer to determine if you qualify for a forbearance.

Interest Rate Reduction

After a certain percentage of the principal is paid, some banks offer interest rate reductions, providing you some repayment relief. Contact your private student loan servicer to determine if they provide this benefit. If your servicer offers this benefit, find out what this percentage is and how you can reduce your principal balance to receive this benefit. Reducing your interest rate may save you a great deal of money in interest payments depending on the balance of your loan.

Auto-Debit Interest Reduction

Most banks offer a reduction in interest if you choose to repay your student loans through their Auto-Debit option. Using this option, the servicer believes the loan will be repaid according to its terms and offers this benefit as an attraction to loan holders. The interest rate reduction varies among lenders so it is wise to contact your loan servicer to confirm this benefit.

Co-Signer Release

Most private student loans are given to students with cosigners such as a parent or guardian due to the lack of credit students often have. The cosigner is just as responsible for repaying the private student loan as the borrower is. The loan also shows up on the cosigner’s credit report, deeming it necessary to repay the loan according to its terms. Borrowers may release their cosigner, releasing them of all financial responsibility of the loan, which means the loan becomes the borrower’s sole financial responsibility.

Each lender has their own specific criteria for a cosigner to be released from the loan, including the borrower having made 12-48 consecutive monthly payments. Once the requirements have been met, the borrower or cosigner must request the cosigner to be released from the loan. Additionally, the borrower must meet the lender’s specific credit requirements for the cosigner to be released from the loan. This is because the student loan would be considered a new loan for the borrower without a cosigner and the interest rate will be set based on the borrower’s credit.

In this chapter, you learned:

  • The importance of making student loan payments on time, every time
  • Repayment options for student loan debt
  • Benefits and drawbacks of student loan consolidation
  • Deferment and forbearance options
  • Options for forgiveness, cancellation, or discharge of federal student loans
  • Consequences of defaulting on student loans
  • Options for repayment of private student loans

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