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Real" life doesn't take long to start after a student graduates from college. The feeling of exuberance that comes with finishing school and hanging a newly framed diploma on the wall quickly dissipates when the first student loan bill comes in the mail.
Ignoring student loan repayment isn't an option, so it's important to understand how the payment system works, as well as what options you have during tough economic times. No matter how overwhelming the bill may be, graduates can take comfort in knowing that there is almost always a way to work with student loan companies so that they can successfully pay their education debts.
Types
The first step in paying off your student loans is understanding what kind of loans you have, the interest rates that are being applied, and the different payment options. In general, your loans will either be federal loans, of which there are three different kinds, or private loans. There are Federal Stafford loans, which may be either subsidized or unsubsidized, and Federal Perkins loans. After you graduate from college, you are usually given a grace period of about 6 months before you are expected to begin repayment. The main difference between the types of federal loans is interest rates. Perkins loans have a set, low interest rate that begins immediately after graduation. Stafford loans, both subsidized and unsubsidized, have variable interest rates that are set by the government. These rates are usually higher than the Perkin loan rate, but lower than the rates on private loans. Subsidized loans are more desirable than unsubsidized because the interest does not gather on them during grace periods and times of deferment.
Private loans are granted by private financial institutions and are usually used as a last resort. The repayment rates and interest rates on these loans are typically higher than federal loans, and can fluctuate drastically at any time. Another downside of private loans is that they are less willing to work with you during times of financial hardship.
Considerations
Once you figure out what kind of loans you have and the total amount you owe, you can begin to design a budget. If you have a variety of these loans, you should make it a priority to pay off the loans with the higher interest rates first. Even if you can only put an extra $10 above the minimum payment, it is worth it. Your goal should be to get rid of your loans as fast as possible so that you do not have to pay a lot of extra money in the form of interest rates.
In some cases, consolidation may be a helpful option. Basically, consolidation means grouping all of your federal loans together, which often lowers your monthly payments. Also, when you consolidate, you are able to lock in your interest rate for the life of the loans. This may or may not be a positive thing, depending on what the interest rate is when you lock it on. It is important to remember, however, that consolidation often means it takes longer to pay the loans off and you will be paying more in the end due to the interest rates. However, if you are struggling to make ends meet, this can be a wise move. Be sure to put as much extra money toward the loans as possible.
Prevention/Solution
Federal loans offer a few different programs to help during difficult financial times. Sometimes you can rearrange your payment amounts so that they are lowered for a period of time, thereby allowing you to get back on your feet. When this is done, the payments usually slowly increase until they reach a final amount.
Another option is deferment, which is when you are allowed to stop making payments for a set amount of time. Interest may or may not continue to be added to the loan depending on what kind of loan it is. In order to qualify for deferment, you will have to meet certain requirements, and the amount of time you have available to defer your loans is set. Once you have used up the time, you cannot qualify for deferment again in the future. The only exception to this rule is for students. If you decide to go back to school for at least part time, you can defer your loans for however long it takes to finish the educational program.
Forbearance is usually used as a last option. When your loans are in forbearance, you do not have to make payments, although interest continues to add. The major downside to this option is that it reflects negatively on your credit score. If you have to use the forbearance option, it is important that you take steps to get out of it was soon as possible. As with deferment, there are certain qualifications that must be met before you can utilize this program.
Some private loan companies offer financial hardship options as well, though the details may vary widely according to each company.
Considerations
Some borrowers may be able to have some of their federal loan forgiven or canceled. To qualify for cancellation, you have to agree to volunteer in an organization such as the National Guard, the Peace Corps, the AmeriCorps, or another approved organization. Also, you may have some of your loan forgiven if you work as a teacher, social worker, lawyer, or doctor in an impoverished area. The forgiven amount, the length of service, and any specific details vary according to the program. Many private loans do not offer forgiveness programs.
Prevention/Solution
Many students wonder what happens if they do not repay their loans. When a loan goes unpaid for a certain amount of time, it is said to go into default. This has major repercussions for the borrower including the destruction of their credit, thereby making it impossible for them to obtain such things as home loans, auto loans and credit cards. The government may also sue the borrower, dock their paychecks, and take their tax returns.
Many federal programs will work with a person who has allowed their loans to default as long as the person is willing to make an honest attempt to make payments. A repayment schedule is usually drawn up and the borrower is expected to make every payment on time. If a single payment is missed or is late, the agreement is null and void. If the borrower is able to stick to the schedule for a set amount of time, the loans will be lifted from default and returned to normal status.
Private loan companies are notorious for aggressively seeking payment.
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