Student loans are hard to live with and for many, hard to live without. Millions think a post-secondary education is worth the time and money if it helps assure a better, fuller life as well as more income. This article will help you get the benefits you seek, by understanding ten simple facts you may not have considered. For more details on the programs mentioned below, click here.
1. Student loans have an outsized impact on your credit report.
You expect that if you have a loan, it will be reported on your credit report…once. Student loans are an exception. What you think of as one student loan may be considered and reported to the credit bureaus as a new loan each semester. That’s two per year over a four or five year period. The result: Ten times the good news or ten times the bad for your credit!
2. Each loan may have a different grace period.
Your grace period is the time you have from leaving school to when you must begin payments. Before you can become delinquent or default on your student loan, you have to have used up your grace period. However, figuring out when you’ve used the grace period up can be tricky. This is because each type of loan may have a different grace period. For example, if you have a federal Stafford loan, your grace period is 6 months, while it is 9 months for a federal Perkins loan. If you are a parent borrower, you’ll generally be expected to start making payments on your Direct PLUS Loan as soon as your loan is fully disbursed (paid out). However, parents may request a deferment (no payment currently due) while their child is enrolled at least half-time and for an additional six months after graduation, leaving school, or dropping below half-time enrollment. For more info, click here.
3. Student loans can go to a collector faster than regular loans.
Most normal loans charge off and go to collections in 180 days. Student loans may charge off in as little as 120 days. Quick action can enable you to resolve any issues with your loan servicer rather than a collector. Another benefit to quick action is that you’ll likely have more options available to you to fix your problem. The later you are, the fewer options will be available to you.
4. There are many repayment options to fit your personal situation.
The trick is knowing what they are and which is best for you. There are seven major payback alternatives.
- Standard Repayment – Payments are fixed and may be made for up to 10 years. This may be your quickest repayment option.
- Graduated Repayment – Payments start low and increase every 2 years. If you expect your income to rise over time, this may be for you.
- Extended Repayment – Payments may be made over 25 years. Lower payments over a longer period equals more interest.
- Income Based Repayment – Payments reflect income and family size. There are 4 plans under this category: Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), Income-Contingent Repayment Plan (ICR Plan). Anything left unpaid after 20 to 25 years is cancelled, plus, if you have a public service job the balance could be cancelled in 10 years.
- Pay As You Earn – An income sensitive plan for you if you have a partial financial hardship. It can help keep your payments affordable with potentially the lowest monthly payment of the repayment plans based on income.
- Income Sensitive Repayment Plan – Is for low-income borrowers who have Federal Family Education Loan (FFEL) Program loans. Payments increase or decrease based on your income.
- Direct Consolidation Loan – technically a loan made by the U.S. Department of Education this option combines one or more federal student loans into one new loan. While not strictly a repayment option, consolidation may result in you’re making only one payment each month and the amount of time you have to repay your loan will be extended.
5. You can take your student loans to bankruptcy court.
Most borrowers believe that student loans are protected from Chapter 7 bankruptcy and essentially bullet proof. But they are not in all cases. The exception to the rule comes into play if you can prove to the court that repaying your loan would cause you undue hardship. The criteria vary by court, but if you can’t maintain a minimal standard of living and repay your loans, you may have a shot at relief. Beware of being steered into a Chapter 13 bankruptcy which could result in even bigger payments.
6. You may be able to get your student loans forgiven.
Truly, the quality of mercy is not strained by student loan lenders. However, your loans may be forgiven if you are totally and permanently disabled; if you die; if your school goes out of business; if your school enrolls you in a program you can’t possibly use (such as going for a degree in law enforcement if you have a felony conviction). You may also get relief if you work in a public service job such as teaching, the Peace Corps, some medical professions or the military.
7. You can lower your student loan bill while you are still in school.
Unless your loan is subsidized, you begin accumulating interest while you are in school. You can save big by paying the interest as it accrues. For example a $5,000 loan could accrue $30 a month in interest. Paying the interest as you go could save you about $1,500! Plus up to $2,500 in interest maybe deductible on your tax return. Also, a small part time job can save you big time. If you can earn $57 a month (13.35 a week or $1.89 a day you can pay all the interest on a $10,000 four year loan saving you over $3,000. And don’t forget your tax deduction!
8. There is special help available to the military.
The GI Bill offers major benefits to service personnel who have at least 30 days of active duty. Current serving active duty personnel get all student (and other) loan rates lower to a max of 6% that were taken out prior to active duty under the Servicemembers Civil Relief Act. Public Service Loan Forgiveness applies to active duty military forgiving remaining balances after 10 years of payments.
9. You really do have to keep up with your payments every month whether you think you can or not.
Student loans are real loans, just like car loans or credit card cash advances. You have to pay them back as promised even if your financial situation has changed, you didn’t get the job you wanted or any job or you dropped out of school. Your loan is handled by a servicer. Know who your servicer is. You’ll find them in your loan documents.
10. Putting practicality over passion can save you thousands.
Passion and peer pressure can easily lead you to over-borrow. Set financial limits early in the game to save yourself from the emotions that are sure to surface as you narrow down your choices. I suggest you consider how much you expect to earn once you are employed in your chosen field. If you are planning on a career as a surgeon you can probably safely consider a larger loan than if your calling is in social work. If you are like most and aren’t sure of your ultimate career field, go easy on the loans. Consider community colleges until you know what you can afford. Buying an expensive education on credit without a solid idea of what you’ll be making can be a life-altering mistake.
