The cost of college has gone up and the amount of money that many students have borrowed to complete their degree programs has also increased. While repaying those loans on an entry-level professional’s income can seem daunting, it is possible.
Public and Private Student Loans
Paying attention and knowing what types of student loans you have is helpful, because it can affect repayment options. One important distinction is whether the loan is public (meaning the government is either the lender or guarantor of the funds) or private. Federal student loans offer many alternative repayment and deferment plans, while private lenders are not required to offer these options.
Don’t remember what types of loans you have? Look on your loan documents or call your lenders and ask. You can also access information about federal student loans from the National Student Loan Data System, or check your credit report.
Depending on the type of loans you have, you may qualify for several repayment options that can affect both the amount of your monthly payment and the length of time you have to repay the money. For example, a graduated repayment plan can start you out with lower payments that increase over time. This plan may be appropriate for you if your income is low now, but you expect it to increase significantly in the future.
With an extended repayment plan, you stretch the length of your repayment period from the standard 10 years or less, up to 25 years, lowering your payment. There are also repayment alternatives that take into account your income and family size when determining your monthly payment. Some will even allow your payment to be less than the interest charges, and cancel any loan balance that remains after you’ve been paying for 25 years.
While alternative repayment plans may not be offered for private loans, you can talk to your lender about the possibility of restructuring your loan if you are struggling. You may also be able to get a lower payment by consolidating your loans.
If You Can’t Pay
If you find yourself unable to pay your federal student loans, you may be able to get relief with a deferment or forbearance. A deferment is a temporary suspension of payments, only permitted under certain circumstances, including enrollment as a half-time student, temporary total disability, enrollment in a graduate fellowship program, unemployment or other economic hardship, active duty in the armed forces, or participation in a rehabilitation program for the disabled. Forbearance is similar to deferment, only interest continues to accrue, and may be granted for such reasons as a high monthly payment relative to your income, medical hardship, or other unforeseen problems.
If you’re struggling to repay your loans, it’s important to take action promptly to avoid default. The consequences of default are severe and can include aggressive collection tactics, tax refund interception, lawsuits, and non-judicial garnishment of up to 15% of your net wages. You will also be ineligible for deferments, alternative repayment plans, grants, and new student loans. Collection fees, which can be significant, will be added to your balance. A default notation will also appear on your credit report, and since there is no statute of limitations on student loans, the negative impact may follow you indefinitely if you continue to not pay.
The good news is that for federal student loans, you have a one-time right to get out of default with a reasonable and affordable payment plan. If you get that opportunity, be sure to settle on a payment amount you know will be affordable, so you can keep your finances on track.
To learn more about managing student loan debt, contact BALANCE, a financial education and counseling service provided to you through your credit union.