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Student Loan Repayment and Deferment

You’re about to graduate from college, and in six short months your student loans will go from grace period to repayment. Between your low-paying post-grad job, rent, utilities, car payment, and groceries, the thought of forking over a few hundred dollars a month to your loan provider just doesn’t sound like a possibility.  Before you throw your credit down the disposal, take a look at your options and learn how you can find a repayment program that fits your needs.

Deferment Facts

While a deferment or forbearance isn’t the ideal way of handling your student loans, these options can help you if you’re struggling to support yourself. Both options are temporary solutions, and will require you to resume payments of your loans eventually. That means you need to expect and accept your repayment terms when your deferment or forbearance ends. If you have a Direct Subsidized Loan you’ll be charged interest during a deferment. Unsubsidized and PLUS Loan holders will not accrue interest during the deferment period. Deferments allow you to make no payments on your loans for up to three years, provided that you meet the financial hardship requirements or are unable to find employment. You must apply for a deferment. If you don’t meet the federal guidelines and your application is denied, you can try for forbearance.

Forbearance Facts

Forbearance requires that your monthly loan payments are 20 percent or more of what you earn during the same time frame.  That means if your job as a barista at the local coffee shop pays you $1,600 per month and your loans payments are more than $320, you may qualify. Like a deferment, forbearance can last up to three years. Unlike a deferment, all loan types are charged interest during the non-payment period. This means that even though you aren’t making payments, your loans are still building up interest – resulting in you owing more money in the end.

How to Apply

Just because your income is low, or you can’t find a job, don’t expect that your loan provider will automatically grant you a deferment or forbearance. You’ll need to request these stop-payment options.  If you have a Direct or FEEL loan, your loan servicer – the place where you are supposed to repay your loans to – is also the place where you need to apply. If you have a Perkins Loan, talk to your school for application information.

Aside from filling out an application you’ll have to submit income verification such as your end of the year tax return, W-2 forms from work or pay stubs. Since both deferment and forbearance are income-sensitive, your loan servicer or school must know your official income.

Other Repayment Options

Standard repayment plan

Standard repayment plans are the original plans offered by your lender. Under a standard plan, you pay a fixed amount each month for up to 10 years. Your actual payment amount and repayment period will depend on your loan balance. Contact your loan holder to find out the monthly amount you'll owe under a standard repayment plan. As a general guide, you'll owe approximately $125 monthly for every $10,000 borrowed, with the exact amount depending on your interest rate. If your loan has a variable interest rate instead of a fixed interest rate, your payments may increase or decrease over the life of the loan.

Graduated repayment plan

Under a graduated plan, payments start out low in the early years of the loan but then increase in the later years of the loan. This plan is tailored to people with relatively low current incomes (e.g., young graduates just beginning their careers) who expect their incomes to increase in the future. Under a graduated plan, your initial payments may be as low as half what they would be under a standard plan. With some graduated repayment plans, the initial lower payment includes both principal and interest, while under other plans, the initial lower payment includes interest only.

Caution: With any graduated repayment plan, you'll pay more for your loan over time than you would under a standard plan. The reason is that interest charges are based on your unpaid balance each month, so the higher balance in the early years of your loan translates into higher interest charges. Also, if you extend your repayment option to keep your payments from becoming too high at the end of the loan, you'll wind up paying more interest over the life of the loan.

Example(s): Assume a $10,000 balance due at 8 percent interest. Under a standard plan, you would pay approximately $14,559, including interest. However, under a graduated plan with a four-year, interest-only option, your payments would be approximately $67 per month for four years and $175 per month for the remaining six years, for a total of approximately $15,816.
Extended repayment plan

Through extended repayment, you extend the time you have to repay the loan, usually from 12 to 30 years, depending on the loan amount. Your fixed monthly payment is lower than it would be under the standard plan, but you'll pay more interest (often quite a bit more) because the repayment period is longer. Many lenders allow you to combine an extended plan with a graduated plan. Though this will lower your payments even further, it will increase your overall costs for the loan.

Example(s): Say you owe $10,000 at 8 percent interest. You extend your payments from 10 to 15 years and reduce your monthly payment to approximately $96 per month. The result is that your total cost for the loan will be approximately $17,203, compared with the $14,559 you would pay under a standard plan.
Income sensitive plan

Under an income sensitive plan, your monthly loan payment is based on your annual income. If you are married, your joint income is used to calculate the required monthly payment. As your income increases or decreases, so do your payments. This choice is offered less often than the other repayment options.

Remember: (1) Most consolidation lenders require an outstanding balance of at least $7,500 on your loans before they will consider you an appropriate candidate. (2)  It may also be possible to lower your interest rate by consolidating your loans, in which case the total cost of your loan will be lower.
Caution: If you have student loans that may be eligible for discharge in bankruptcy, loan consolidation will prevent you from discharging these loans because consolidating your loans is the equivalent of getting a brand new loan. Further, even though a married couple can consolidate their loans jointly, this is generally not a good idea. If you later divorce, you and your spouse are each responsible for the entire loan amount.
Accelerated payment

In contrast to having too little money, some lucky individuals may have plenty of money to apply to their student loans. If you stumble upon an unanticipated sum of cash, you may want to consider accelerated payment where you pay more than the monthly minimum on your loans. The excess payment can be applied to your principal balance. The result is total lower interest payments and a reduction in the overall cost of your loan.

Tip:  There are usually no penalties associated with paying off your student loans early. If you have more than one student loan, you'll want to pay off those with the highest interest rates first.