Repaying Your Student Loans
A guide to repayment options and terminology for student loans.
With federal student loans, there are several types of repayment plans, so before your loan enters repayment, check to see what plans are available to you. You should always choose the plan that strikes the best balance between monthly affordability, total accrued interest and your expected income after leaving school.
Also, there is critical repayment terminology that you need to understand—including loan terms such as grace period, forbearance and default.
With federal student loans, there are several repayment plans. Your loan will automatically go into standard repayment if you don’t request otherwise. This plan requires monthly payments in the same amount for up to 10 years, with a minimum of $50 per month.
Before your loan enters repayment, check to see what plans are available to you. Choose the plan that strikes the best balance between monthly affordability, total accrued interest and your expected income after leaving school.
When deciding on a repayment plan, be sure to leave enough time—for paperwork and to get your questions answered. If you want to change plans during repayment, check with your lender or service provider.
Key Repayment Terms You Need to Know
Grace Period and Deferment
With some loans, you have a grace period (six to nine months after leaving school) before you must begin repayment. When this grace period is over, you must start paying back your loan according to the schedule. If you require more time, check on your eligibility for a deferment.
A deferment gives you extra time before repayment begins. Deferments may be obtained prior to the end of a grace period. If you expect to need a deferment, make sure to allow enough time for your application to be processed.
What if you have a family emergency or other hardship that interferes with your ability to maintain your repayment schedule? You may request forbearance from your lender. This may allow you to reduce or postpone payments and possibly extend your repayment period.
If Stafford Loan debt totals more than 20% of your gross income, lenders are required to automatically grant forbearance.
Forbearance usually lasts three to six months, and may be renewable annually for several consecutive years. However, be aware that interest accrues even during forbearance.
Your lender may place your loan in default if you miss required payments for nine months or longer. Simply stated: You do not want this to happen! How can default make your life seriously unpleasant? Let us count the ways:
- The entire balance of your loan becomes due and payable immediately.
- You are ineligible for any additional financial aid.
- You lose all eligibility for deferment and forbearance.
- Your credit rating takes a major hit, and you may not qualify for other types of loans or credit.
- Your paychecks may be garnished.
- Your tax refunds and bank accounts may be seized.
- You may be sued…
- …and lose in court, allowing the “repo man” to come for your car or other property
Default on student loans has no statute of limitations, so penalties will continue in perpetuity until you pay off the debt or die.
Obviously, the best way to stay out of default is to make your loan payments on time. But if you start having money problems, talk to your lender—immediately. The lender doesn’t want you to be in default, either. The sooner you bring up any potential repayment issues, the sooner a solution can be found. And you may be able to maintain your standing as a good borrower.
If you do default on a loan, your first priority should be to get out of default as fast as possible. Contact your lender or guarantor right away to explain the problem and to set up a manageable repayment schedule.
If you make timely payments for a year, your loan may qualify for rehabilitation. Achieving rehabilitation means you regain the rights, privileges and good standing that are lost in default. And that will make everybody happy.