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Staying in the Black With The Student Loan Blues

Personal Finance

How do I repay my federal student loans and still pay my bills?

Group of Students Celebrating their Convocation

Now is the time of year when proud parents of the senior class gather to watch their children prepare to graduate from college.

After hats are tossed, tears are wiped away, and the celebratory cake is gone—the graduates will begin their new lives in the real world.

But many recent graduating classes face a wretched job market where there may be as many as ten candidates for every job. Consequently, one of the most daunting tasks becomes the challenge of not falling behind on student loans.

While challenging times can build moral fiber, you don’t want to build character by getting involved in the debt trap.

As a mom of seven who has seen the difference between graduating with student loan debt versus the freedom of debt free, I know the value of trying to stay ahead of those student loans.

I believe that every college grad can adequately manage their student loan debt by understanding how the system works.

Understand the Consequences for Getting Behind on Student Loans

As a mom of kids in college as well as a recent graduate, I know how challenging the job market is and what a challenge these graduates face.

First of all, there will be interest charged for late payments as well as fees that will inflate the amount you owe—and chances are good that you may owe too much as it is!

The government could garnish your wages and withhold your tax refund if you default. Not to mention a massive hit on your FICO score when you’re just starting out and trying to build a good score that will help you get lower interest rates on a car or a house.

This isn’t a good way to start your post-graduate life!

Understand Your Grace Period

Borrowers typically have a few months after graduation before you have to start repaying your federal student loans.

For most federal student loans, the grace period is only six months. Most federal student loans have up to ten years to repay.

It’s important that you contact your loan provider and find out when the statements begin—especially if you haven’t received notification yet.

Understand the Qualifications for Income Based Repayment Programs

Under this program, your loan payment could be reduced based on the amount of discretionary income you have available.

In most cases, your loan payments won’t exceed 10% of your total income. After 25 years, anything you still owe on the loan will be forgiven.

It is not automatic; you definitely need to apply for this program by contacting the company that is servicing your student loan.

If you’ve moved a time or two and your loan papers have not been forwarded to you, and you are not sure who services your student loan, then you can go to the database of the National Student Loan Data System.

You’ll also need to authorize the IRS to provide last year’s tax return to the Department of Education. If you feel that your tax return doesn’t reflect your current situation, there’s a form you can use to show how your situation has changed.

Get info on these forms and criteria, as well as links to major student loan services at IBRinfo, a website that is set up by the Project on Student Debt.

Understand the “Quick Fix” Options of Deferment and Forbearance

If your new job starts in six months or if you have an unpaid internship, are unemployed, are still in school, or experiencing economic hardship, you can apply to have payments on your federal student loans deferred for up to three years.

For subsidized Stafford loans (provided to students who demonstrate financial need), the government will pay the interest on the student loans during deferment.

Interest on unsubsidized Stafford loans will accrue during deferment. If you don’t qualify for deferment, then you still might be eligible for forbearance, which allows you to put off payments for up to three years.

It’s harder to qualify for deferment than forbearance because you will still have to pay interest that accrues in forbearance.

Understand How Important It Is to Start Paperwork Early

You must continue to make full payments until you’re notified otherwise. It takes longer for income-based repayment paperwork to get processed and doesn’t take as long for deferment and forbearance because the latter two are temporary relief from loan payments.

Whereas income-based repayments could be longer-term, depending upon how long you are in that job and making that salary.

It’s essential to look at forbearance and deferment as short-term fixes and not long-term—that’s why it’s vital to file for these right away while you’re looking for a job.

But if it looks like your payment problems will last longer than a few months, you need to look at income-based repayment.

Understand the Option of Extending the Payment Term

If you are a borrower who owes more than 30K, most lenders will allow you to extend the term beyond the standard 10 years, thus reducing monthly payments.

The amount of interest you pay will increase, though, particularly if you extend payment over the maximum term of 25 years. And who wants to spend the next 30 years paying off a student loan? So I would only recommend this option as a last resort.

Try to pay it within the standard 10-year term so that you can avoid thousands of more dollars in interest.

Understand the Limited Options for Private Student Loans

The outlook is not as sunny for those who have private loans. You have fewer options.

Private education lenders don’t participate in the income-based repayment program, and they’re not required to allow you to defer payments, even if you’re out of work.

Read your loan agreement if you’re having trouble with your private loans. It may require that the lender grant you forbearance under certain conditions. Even if your contract doesn’t include an economic hardship provision, your lender may be willing to provide relief.

Some lenders have become more flexible in this post-great recession environment. You could ask for interest-only payments or even to change the terms of the loan. (More info here at Student Loan Borrower Assistance)

Based on what you just read, what is one thing you can do this week to stay in the black and avoid the student loan blues?

Photo credit: aluedt via photopin cc

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