Paying Back Student Loans
More than 4.4 million college student Loans earned some kind of college diploma in 2021 — from associates to doctorates or professional degrees — but whatever may be said about the class of ’21, we do know this: About 70% will soon face college. The reality of student loan debt.
President Joe Biden and many members of Congress seem keen on the idea of forgiving student loans debt — somewhere between $10,000 and $50,000 is the hotspot — but student loan forgiveness is a political battleground, with no certain results. Forgiving debt seems generous, and maybe even the right thing to do. But who gets stuck with the bill?
What this interesting uncertainty means for freshly minted college graduates: Don’t bet your budget on watching your student loan balance crumble. The wisest course is to prepare it in such a way that you will have to pay it back one way or another.
Prepare for student loans payments
Under normal circumstances, new graduates have six months to start paying off debt. It is half a year to get the land lay.
There are many student loans repayment plans to choose from. Some are based on a percentage of discretionary income, last for 20-25 years, and may include loan forgiveness if all payments are made on time. Others start with low payments that increase your income over time.
Regardless of the plan you choose, make sure you know who your loan holder is, where to send payments, and how much to pay. You may also have questions about discharging your loan or the consequences of missed payments. Get answers to your concerns before you fall behind and join the 7.5 million borrowers in default when provisions of the CARES Act went into effect.
Tips for preparing for student loan repayments:
If you haven’t already – you were busy; We’ve been there — use the grace period to research student loans repayment options (and look for additional extensions).
- Create a budget built around your student loans.
- Prioritize paying off student loans.
- Talk to your loan servicer.
- Set up automatic payments to avoid late fees.
- Avoid student loan default at all costs.
- Know the exact date when you expect to pay off the loan and shoot for that goal.
When do student loan payments start?
Good news for student loan borrowers. You don’t have to start making student loan payments until the moratorium ends, which is at least September 30, 2021.
For graduate students, there is also something called a grace period which can be anywhere from six months to nine months. This provides an adjustment period after you graduate, drop out, or slip below half-time status. The grace period is designed to provide an opportunity to find a job, choose a repayment plan and start earning income before you are overwhelmed with bills.
Are you unemployed? You may be eligible for unemployment deferment. For federal loans, if you qualify, you can defer monthly payments for up to 36 months. However, borrowers must reapply every six months, showing proof of unemployment benefits and an active job search.
For private loans, any delay is at the discretion of the lender.
The following types of loans have a grace period of six months:
Direct Subsidized/Unsubsidized Loans (sometimes called Stafford Loans or Direct Stafford Loans)
Some private student loans
PLUS loans have no grace period, and you must begin repaying them as soon as they are fully disbursed. However, those who receive a PLUS loan as a graduate or professional student receive an automatic six-month deferment after graduating, dropping out of school or dipping below half-time enrollment.
Similarly, parents who secure a PLUS loan for their child’s education can request a six-month deferral under the circumstances mentioned above.
The grace period on a federal Perkins loan depends on the school that gives you the loan. If you have this type of loan, check with your school to find out when you should start making payments.
The grace period on a private student loan depends on the lender and your loan agreement. Most private student loans have a short grace period, but you must check with your lender to make sure.
You can also choose to consolidate your student loans during the grace period. This will group your federal student loans into one payment and make things significantly easier.
If you have federal student loans, you can choose to consolidate them with the Department of Education, through your loan servicer, or with a private lender.
Avoid Rushing: Borrowers who consolidate early surrender their grace period balance; Repayment begins when the Direct Consolidation Loan is processed. You can ask for the process to be delayed until the end of your grace period.
Private lenders offer low interest rates, but only to people with high credit scores. If you have good credit and want to lower your interest rates on a medical school loan, for example, working with a private lender may be the best option.
How much do I pay each month? Can I pay more?
Your minimum monthly payment depends on the type of loan, your payment amount, the length of your payment plan, and your interest rate. Generally, borrowers have 10 to 25 years to repay federal loans in full. A shorter length of repayment period or a larger loan will result in higher monthly payments.
The standard 10-year repayment plan is by far the most popular plan among borrowers, but that doesn’t mean it’s the best plan for you. This is the default plan. Borrowers are automatically enrolled in the standard repayment plan unless they opt for a different plan.
You will make fixed monthly payments for 10 years. It is a great plan if you can afford long term monthly payments and the cheapest option as you will pay much less in interest. If you lack the income to support these payments, however, you should enroll in one of the income-driven repayment plans.
Or maybe you are considering applying for the Public Service Loan Forgiveness Program. Work full-time in a qualifying field – government at any level, or nonprofit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code – and make 120 qualifying monthly payments, and whatever . The remaining amount will be waived off.
To make extra payments, you can always pay any amount above the minimum payment each month. Right now, under the zero-interest Covid-19 deferral, your full payment reduces the principal. There is no penalty for early payment; Taking this approach can save you a significant amount of money in interest over time.
How can I pay?
Once the bill is due — again, only if it’s due — you’ll be responsible for sending your monthly payments to the companies that hold your loan.
If you don’t know where to send the payment, check with your school’s financial aid office. The financial aid office can tell you who your loan servicers are. You can then contact your loan servicers directly with specific questions.
You can also find loan information through the National Student Loan Data System. Now more than ever, it is important for you to know your balance details.
Be aware that even if you don’t receive a bill, your payment is still due. If you move after graduation, or you moved during a CARES Act break, tell your loan servicer your new address so you’ll receive bills and stay on top of your payments when — if — they resume.
Consider changing your loan due date to make budgeting easier. Monthly payments may be due before you receive your paycheck. Contact your loan servicer to see if your payment date can be switched to a more convenient day.
What are my options when I am having trouble making minimum loan payments?
If your monthly required payment is more than your income allows you to pay, you may be eligible for income-based repayment schemes such as the Income-Based Repayment Scheme (IBR); Income-Contingent Repayment Scheme (ICR); or Pay As You Earn (PAYE) or Modified Pay As You Earn (REPAYE).
Income-driven repayment plans are based on your income rather than the amount of your payments, reducing repayment requirements for low-income borrowers. Typically, these plans factor in your income, family size, and the state where you live. You pay between 10% and 20% of your discretionary income and the plans last 20-25 years depending on the program.
If you anticipate that your financial hardship will be short-term—perhaps you’re between jobs, saw your income drop during a pandemic, or are on medical leave—you can temporarily defer payments on federal student loans. With private lenders, you don’t know until you ask.
However, under normal circumstances, your loan will continue to accrue interest, meaning you will owe more when you resume payments.
You can extend the time you pay off a federal loan by using an extended repayment plan.
Or, if you expect your earning power to increase significantly over the years, you can choose a graduated repayment plan. This allows you to pay less initially, with monthly payments increasing over time.
What are the consequences of missed payments? Defaulting?
Student loans never go away. There is no statute of limitations, and student loans are rarely discharged even in bankruptcy — a fact reaffirmed by the US Second Circuit Court of Appeals in March.
With few exceptions — and direct relief from Washington — your student loans follow you until you pay them off.
When the payment schedule resumes, if there is no change and you make a late payment on a federal student loan, you may be liable for late fees of up to 6% of the payment.
Defaulting on federal student loans carries more severe penalties. Before CARES Act forbearance, you were considered delinquent when you didn’t make a payment within 90 days. When you haven’t made a payment in 270 days (nine months), you will go into default and suffer huge consequences for it.
The government can garnish 15% of your wages and Social Security benefits as well as offset income tax refunds. The government may also deduct 25% of each payment for collection fees, which significantly increases the cost of the loan.
Late or missed payments also appear on your credit report and can hurt your score.
If you can’t afford your payments, it’s better to contact your loan servicer and review your payment options rather than simply not paying. Not paying and staying silent is never a good combination.
Student loan repayments during COVID-19
Passed in March 2020 to combat the economic effects of COVID-19, the $1.9 trillion CARES Act halted payments on federally backed student debt and reduced interest rates to zero. President Biden extended the moratorium on payments and zero-percent interest through May 1, 2022. That means no payment is due until then. Additionally, interest will not accrue and your credit score will not be damaged if you do not make payments during the moratorium.
If you have extra money in your budget, it may seem tempting to take this moment to attack your student debt. After all, every dollar you pay now will go toward principal. But there is a better way.
If your loan balance is less than $50,000, don’t consider making a payment until the political smoke clears. Instead, move your deferred monthly payments into savings. The president and his Democratic colleagues are only talking about clearing some level of student loan balances. No one (yet) has mentioned the refunding payments made during the coronavirus-triggered hiatus.
When the horse trading ends and the relief package is, presumably, signed (sometime in the fall), you can be debt free with money in the bank. At worst, you’ll have built up a healthy balance to pay off whatever principal remains.
While you’re at it, be extremely skeptical of anyone who claims they can offer student debt relief for a fee. The Consumer Financial Protection Bureau went after a California-based student loan pro, alleging it charged borrowers more than $3.5 million to file paperwork to gain access to debt-relief programs. The catch: applying to those programs (many are described below) is free.
Can I cancel my student loan?
Federal student loans can be canceled under the following circumstances:
- Your college closed while you were a student there or within 90 days of your withdrawal.
- Your school owed you or your lender a refund after you withdrew but never did.
- The loan was the result of identity theft.
- The student borrower dies.
- You become totally and permanently disabled.
- Can my loan be forgiven?
Depending on your occupation, federal student loans may be eligible for certain forgiveness programs.
As described above, if you have an IBR plan, any remaining balance after 10 years will be forgiven if you spend those years working in a public service field such as military, public education, or police work, or working for certain nonprofit 501(c). (3) Organizations.
You can have up to $17,500 in loan forgiveness if you teach in a low-income area for five years.
If you ever find yourself struggling with student loans, keep in mind that you always have options. Don’t wait until you miss several payments or default on your loan; Get help as soon as possible to create a plan that works for you and your budget.