The Basics of Student Loan Repayment

Anya Kamenetz made an excellent breakdown of student loan repayment terms and what they mean. Below are excerpts:

Studies show that only one in five student borrowers make all of their monthly payments on time in the first three years of repayment. Yes, that loan can sneak up on you after that six-month grace period. And almost everyone I’ve spoken with who has taken out a student loan fails to fully consider the bite they’re going to take in the long run.

But forget any regrets you might have. You’ve taken out those loans, and the thing to do now is come up with a doable plan to close them out and get on with your life. Here are 10 terms you need to know to become a wizard-level repayment master.

Good Standing: This has nothing to do with posture. It means being up to date with repayment. The best way to do this is to set up an automatic direct debit on the due date each month, from your bank account to the student loan company or companies. Direct debiting might even net you an interest rate discount of a quarter point to a full percentage point.

Borrowers in good standing also keep in touch with their lenders, letting them know if they move or change contact information. You should put as much of your correspondence in writing as possible and save copies of it. If you’re late with a payment, call up the lender and say, “It’s important to me to remain in good standing. Can I send you a good-faith payment (of at least $50) now?” Then ask what repayment options you might have.

Deferment: This is a period in which you don’t have to repay your loans. While enrolled in any school at least part time, you’ll automatically get an in-school deferment, plus six months’ grace period after you leave. Military service brings automatic deferment, too. Otherwise, if you’re broke and need a break, you must apply in writing to your lender. You can get a deferment for up to three years at the lender’s discretion if you can supply evidence of unemployment, low income, and/or financial responsibilities such as children. The good news is, if you get an official deferment on a subsidized (Stafford) loan, the government picks up the interest on the unpaid debt.

Forbearance: This is another, more expensive way to take a break from your loans. Again, if you’re under financial distress, you can apply in writing to suspend payments, make reduced payments, or pay only the interest for up to 12 months straight and a total of three years. The bad news is that, in forbearance, you have to pay at least the interest or it is added to the debt, meaning you’re paying interest on interest, which can add up fast. I’ve met many people in forbearance whose loan balances are growing year after year. Still, it’s a better short-term solution than just skipping payments.

IBR: Although it sounds a bit like a distasteful disease, IBR stands for income-based repayment. Like extended repayment (stretching out your payments from the standard 10 years to 25 or 30 years) or graduated repayment (payments go from lower now to higher every two years), this is a way to manage your loans long-term.

But IBR has some important differences. First, it is offered only for federal student loans (this started in July 2009). Private lenders have “income sensitive” plans, but they basically amount to longer repayment terms and more interest. Under IBR, you pay in proportion to your annual income and family size, to ensure that your loans aren’t too arduous. For most eligible borrowers, IBR payments total 10 percent or less of your total income. Plus, the loan is forgiven after 25 years — just about the only way you can ever walk away from a student loan balance. If you have dependents and are committed to a low-paying profession such as social work, IBR could be a godsend.

Consolidation: This means combining several student loans into one loan with asingle monthly payment.

When you consolidate, you can choose to lower and stretch out the payments from the standard 10 years to up to 30 years, but this means paying more interest in the long run. Consolidation was a great deal a couple of years ago when interest rates were at an all-time low. Today these loans may be more difficult to get due to the student loan market tightening. The main benefit is simplifying your loan, as well as resetting the clocks on benefits such as deferment and forbearance.

Delinquent: This is not the term for kids who smoke outside the Kwik E Mart. This goes into motion when you miss a single monthly payment. You’ll start to get phone calls and letters. Penalties and fees are added to your loan, and the late payment is eventually reported to credit bureaus, which affects your credit scores. To get out of delinquency, call up your lenders and catch up on your payments as soon as possible. They may be willing to accept a payment plan — that is, reduced payments for some period of time.

Default: This is not a tennis rule. After nine months of missed payments, your loan goes into default. When it officially hits default, the full balance of the loan becomes immediately due, so it explodes with massive penalties, fees, and capitalized interest, which have effectively no limits. A $30,000 loan can become a $90,000 loan after two years in default.

Default happens to only about 5 percent of loans in the first two years after repayment, mostly to students who drop out. But if it does happen, your options are limited. Unemployment, illness — it doesn’t matter. You may be able to negotiate a payment plan, but under most circumstances you can’t discharge a defaulted student loan in bankruptcy.

Garnishee: This has nothing to do with parsley or lemon wedges. Under federal law, a guarantee agency can garnishee (divert from your bank account to theirs) up to 15 percent of wages to repay defaulted student loans, without taking you to court. While they’re at it, they can seize tax refunds, federal disaster relief payments, or Social Security and federal disability assistance. Other consequences include ruined credit, inability to be approved for a mortgage or car loan, loss of your professional license or government security clearance, and those annoying calls from collection agents. Normally, as the Supreme Court affirmed in 2005, there is no statute of limitations on collecting a defaulted student loan.

Rehabilitation: This is not where Paris and Lindsay have to go. This means getting out of default. You can do this by applying for and signing an agreement to restart payments on your loans. Then you have to make at least nine payments. These must be consecutive, “reasonable and affordable,” voluntary (no seized wages), on-time (within 20 days) payments. Then your rehabbed status is reported to credit bureaus, you become eligible for higher education aid once again, and you continue to repay the loan while a new lender purchases it and begins to service it. Congratulations!

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