For most college students, by the time you have completed your undergraduate or graduate degrees, there is a good chance you will have taken out a student loan. Now, comes the fun part—paying it back. Understanding your rights, loan requirements, and overall expectations will help make the payback process a lot smoother.
Near the end of your senior year, if you have taken out student loans, you will be required by law to receive an exit interview. During the interview, you will speak with your financial aid advisor about your student loan repayment obligation and various options at your disposal. While you will have a good understanding of what loans are in general near the end of your college education, federal student loan terms and conditions are very different from other types of loans. Therefore, take this opportunity to really learn about your repayment requirements and what to do if various events occur.
If, for some reason, you are unable to make the exit interview, you can request that the information be mailed to you and speak with an advisor over the phone. While you may be able to get some of the information from the Internet, it is highly advisable that you speak with your financial aid advisor about your specific circumstances. Some of the loan conditions you will learn about during your exit interview include the following:
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Grace Period - Particularly during these tough economic times, you may not find a job immediately after graduation. The federal government understands this. Therefore, you will be granted a grace period from six to nine months (Federal Stafford Loan - six months; Federal Perkins Loan, nine months) after you stop attending school to start repaying your student loans. Whether you graduate, take some time off, or drop-out of school, this will not change. You will still be granted this grace period.
During the grace period, be sure to organize your finances. This process entails your estimating all of your monthly expenses, projecting your income, and developing a spending plan (budget). Your student loan payments will be a part of your spending plan. If you are still unemployed at the end of your grace period, you can request a deferment and forbearance until you find a job.
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Repayment Options – Unlike most typical loans, with most student loans you are able to arrange a payment schedule that works for you. Here are some of the most common repayment options:
- Standard Payment Plan – Assuming you can afford this plan after graduation, it will offer you a lower loan cost over the life of the loan than all other options.
- Graduated Payment Plan – This plan is one of the most common, as it allows you to make lower payments in the beginning, but this increases over time. The assumption is that your income will increase over time and, thus, so will your ability to make a larger loan payment.
- Income-based Payment – Similar to the graduated plan, this plan is computed based upon your actual income. For example, you may elect to pay a certain percentage of your income without regard to the income amount. As your income grows, so will your payments.
- Extended Payments – This payment option is popular for those with high student loan balances, usually resulting from both undergraduate and graduate degrees combined. The payments are smaller, and the life of the loan becomes much longer. As a result, this significantly increases the amount of interest paid on the loan.
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Loan Consolidation – You will likely have several loan sources from which you borrowed money at the end of your college years. Consolidating your loans may actually lower the total amount you pay on your loans, as a given lender will likely offer you one low interest rate for all of your loans combined, as opposed to having multiple loans with different interest rates, terms, and conditions. For example, the following loan types have different payoff periods:
- Federal Stafford Loan - 10 year repayment term
- Federal Perkins Loan - 10 year repayment term
- Federal Consolidated Loan - 30 year repayment term
- Private Loan – 10 to 25 year repayment term
As a college graduate, you will likely have a combination of each of the above loan types. Therefore, it makes good sense to consolidate.
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Deferments & Forbearance – Repaying your student loans without a break or pause is the most ideal option; however, some circumstances may warrant your postponing or even reducing your monthly student loan payments. For example, if you were to lose your job or become disabled or experience some other economic hardship, deferment or forbearance are viable options available to you. (These options may also become available should you decide to return to school.)
- Student Loan Deferment – A student loan deferment is a period of time during which your payments are postponed. The two most popular deferments include in-school deferments or unemployment deferments. Each requires specific documentation.
- Student Loan Forbearance – A student loan forbearance is an agreement between both the lender or servicer and the borrower to temporarily postpone payments, extend the timeframe for making monthly payments, or reduce the monthly payment on a short-term basis.
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Student Loan Default – Your student loans constitute a promissory note to repay, and, as such, you are required to pay back your loans. If you fail to do so for any reason, your student loan goes into default. Consequences for allowing your student loan to go into default include the following:
- The lender reserves the right to declare the unpaid balance, including interest, due immediately.
- The lender can send the loan to a collection agency.
- The lender may report the default to your school and the federal government which may prevent you from obtaining future assistance from federal financial aid programs.
- The lender may report the default to credit-reporting agencies.
- The lender or government may take legal action against you.
- Your wages may be garnished.
- Your state and federal income tax refunds may be withheld.
- You may be required to pay fees and charges, as permitted by law, for the collection of the loan.
The above consequences can be quite severe. Therefore, you should try to avoid defaulting on your student loan if at all possible. Here are some steps you can take to avoid going into default:
- Make your monthly payments on time.
- Report important changes to your lender. These changes might include enrollment status, name change, address, telephone, and employment status.
- Contact your lender immediately if you are having trouble making your monthly payments. You can request a deferment or forbearance, both of which will prevent you from going into default.
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Student Loan Forgiveness - While paying back your students loan is a requirement, you may not have to pay it all back yourself. Should you have the time and energy, volunteering for certain government organizations may entitle you to having a portion or all of your student loan forgiven or canceled. In addition to volunteerism, many professional organizations also offer some form of student loan payback.
Some of these organizations include the following:
- Peace Corps – Allows you to receive up to a 15% cancellation of your Perkins loans for the first two years of service and up to 20% for the third and fourth years. Therefore, if you served for four years, up to 70% of your student loans can be forgiven. Joining the Peace Corp requires extensive international travel, often to third world countries. Be sure to learn more about the requirements prior to signing up, and contact your lender in advance for any special instructions.
- AmeriCorps – Allows you to receive up to $7,400 for a year of service, of which $4,725 can be used toward education. This education award can be used toward future education or to pay off educational debt. Unlike the Peace Corps, you will not have to travel internationally. Be sure to learn more about the requirements prior to signing up, and contact your lender in advance for any special instructions.
- Commissioned Corps – If you going into the medical field, you may consider taking a job with the United States Public Health Service as a Commissioned Corps officer. Depending on where you are deployed, you may be eligible to have some or all of your student loans paid off. In addition to promoting and fostering good public health, they help to prevent the spread of disease through various programs. Be sure to learn more about the requirements prior to signing up, and contact your lender in advance for any special instructions.
- Military Service – By joining the Army, Navy, Air Force, Marines or the National Guard, you qualify to receive education assistance. You will have to check with your local recruiter to determine the specific educational benefits and required length of service. Be sure to learn more about the requirements prior to signing up, and contact your lender in advance for any special instructions.
- Teaching – If you decide to become a teacher, depending on where you teach and for how long, you may be eligible for some form of student loan payback or even deferment of some of your loans. Some programs involve teaching in low-income and underserved communities as well as teaching certain subjects in which there is a shortage of teachers. Be sure to learn more about the requirements prior to signing up, and contact your lender in advance for any special instructions.
- Law Enforcement – Becoming a law enforcement officer may entitle you to some form of student loan payback. Be sure to learn more about the requirements prior to signing up, and contact your lender in advance for any special instructions.
Be sure to contact your lender in advance for any special instructions prior to accepting any of these positions. In addition to these volunteer programs and full time occupations, other loan programs are available for legal, medical, and other fields. Be sure to speak with your financial aid department about other potential loan payback programs.
Paying off your student loans after you finish college should not be a cause of stress for you. Instead, you should take joy in the fact that you have worked hard and have completed college. Repaying student loans is a part of the process of transitioning from college to the real world. Good luck!