Student Loans

 

Repaying Your Student Loans


Now that you’re prepared for a career and independence, one of your first new tasks will be to start repaying all of those education loans.


Time to use that education to help
you repay those student loans.

If you have federal debts or government-guaranteed loans, you are required to attend a financial counseling session at your school during your final semester. This can be an in-person seminar or an online session. You will learn about the importance of timely payments and what you can do if you’re having trouble paying.

Your repayment plan will depend on which type of loan you have. For example, borrowers of Perkins loans will be required to pay a fixed monthly amount (minimum $40) until the loan is paid in full. Students with Stafford loans have four repayment plans to choose from: standard, extended, graduated, and income-sensitive. Both Perkins and Stafford loans are expected to be paid back in 10 years, not including times of forbearance or deferment. Private loan terms are much more varied, and repayment periods could be as long as 30 years or as short as four, depending on the loan, lender, and amount borrowed.

Standard Repayment

Prepay Your Student Loans?

While admirable, many financial aid experts maintain that the urge to prepay students loans is misguided and could be a poor decision. Why?


Student loans usually have the lowest interest rates around. If you are just starting out in life, you’ll probably have plenty of other places to spend money (a car, wedding, or house—just to name a few). Whether paying for these items with credit cards or loans, they will probably all have higher interest rates than your student loans, so paying off student loans and getting out other commercial loans may actually cost you money in interest. Hold on to your money and continue making fixed monthly student loan payments.

The standard repayment plan is pretty straightforward. Graduates make fixed monthly payments (minimum $50 for Stafford loans, minimum $40 for Perkins) until the loan is repaid.

Extended Repayment

Similar to the standard repayment, this option involves fixed monthly payments but over a longer time period. Monthly payments amounts are lower, but the overall costs of interest increases. This option may only be available to graduates with direct loans.

Graduated Repayment

This option takes into account the idea that your starting salary will be relatively low, but is expected to increase over time. Consequently, the loan payments start out low and increase through the years. Payment must be at least equal to accruing monthly interest. Although this may give some much-needed budget relief in the early years, it will also cost you more in interest over the long run.

Income-sensitive Repayment

Similar to graduated repayment, with this option your payments are based on your income. However, income-sensitive plans are adjusted annually to account for changes in the borrower’s income and prospects. Income-sensitive repayment is available for Stafford and PLUS borrowers who used private lenders. A similar program (income contingent repayment) is offered to borrowers with direct federal loans other than PLUS.

Deferment, Forbearance, and Forgiveness

When they first see the loan totals, the thought on everyone’s mind is: What happens if I can’t pay it? You do have options. If you can’t pay your loans and you ignore the problem, you’ll default, which is the worst choice of all. If you default, your credit score will drop. This would make it harder in the future to borrow money for a car, house, or any other large purchase. Your wages can be garnished, federal and state income tax refunds can be seized, and you will probably owe even more money in late fees and penalties.

Don’t let this happen to you! If you see your finances sinking, be proactive. Look into deferment, forbearance, or forgiveness to buy yourself a little breathing room and stay on track.

Tax Credits and Student Loans

Tax deductions (which reduce your taxable income) and tax credits (which reduce the amount you owe in federal taxes) can help take the sting out of student loan payments.


The HOPE Scholarship Tax Credit covers 100% of the first $1,000 of tuition and fees payments, 50% of the second $1,000 with a maximum of $1,500 per year. This credit can be taken in the first two years of school.

The Lifetime Learning Tax Credit covers 20% of the first $10,000 in tuition and related expenses per year. There is no limit on how many years this credit can be claimed. A student or parent cannot, however, claim the HOPE Tax Credit and Lifetime Learning Tax Credit in the same year.

In addition, student loan interest and tuition and fees can often be deducted. For more information on qualifying for tax credits and deductions, read “Higher Education Tax Breaks” on the Student Loan Funding site.

Deferment

Federal loans can be deferred for up to three years because of economic hardship. Loans may also be deferred if you go back to school for another degree or you work in a needy field (for example, you become a teacher in a low-income area). When subsidized loans are deferred, the government again pays the interest during the deferral period.

Forbearance

Forbearance is similar to deferment, but not quite as accommodating. Graduates who don’t qualify for deferment can get a forbearance to avoid or lessen payments in the short-term. A forbearance can be up to a year in length, and there is no limit to how many times you can be granted forbearance other than your lender’s patience.
Unlike deferment, forbearance cannot be subsidized—you will be charged interest during the forbearance period. For more specific details, speak directly with your lender(s).

Forgiveness

Forgiveness is a blessing—a very large blessing in the world of student loans. If your loans are forgiven, you are dismissed from paying a portion or even the full amount of these loans. Graduates usually earn forgiveness based on their field of work—as a teacher in a needy area, medical technician, Peace Corps volunteer, or other needed career. Loans may also be canceled if the borrower becomes permanently disabled or dies.

Conclusion

Student loans offer everyone the opportunity to get an advanced education. The process can be confusing at times, but with the knowledge from this Trusty Guide, you should be able to choose your loans wisely and manage your debt. Now you just have to worry about studying for class!

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