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Questions about Obtaining and Repaying Student Loans

Mark Kantrowitz

October 26, 2009

How will my credit score effect my ability to get the funding I need for graduate school? If my credit is not great, will I be able to get the loans I need to cover my college costs? — Katy C.

The federal Stafford loan does not depend on your credit history. As a graduate student you will be able to borrow up to $20,500 a year and $138,500 in total (including undergraduate debt) from the Stafford loan program. The Stafford loan limits are $40,500 a year and $224,000 in total at certain medical schools.

If you need more money than is available through the Stafford loan program, you may be able to borrow money from the federal Grad PLUS loan program. This is similar to the Parent PLUS loan for parents of undergraduate students, but with the graduate or professional student as the borrower. The PLUS loan has no aggregate limit, and the annual limit is based on the college’s cost of attendance minus other aid received. Eligibility for the Grad PLUS loan depends on your credit history but not your credit score. PLUS loan borrowers must not have an adverse credit history which is defined as having had a foreclosure, repossession, tax lien, wage garnishment, default determination or bankruptcy discharge in the last five years, or a current delinquency of 90 or more days.

If you don’t qualify for the Grad PLUS loan, your options are limited. Students who do not qualify for a Grad PLUS loan are unlikely to qualify for a private student loan because lenders usually have stricter credit underwriting criteria for private student loans than for federal student loans. This can include requiring a minimum credit score, using a 7 or 10 year lookback for bankruptcy discharges, disallowing current delinquencies of 60 or more days, and requiring a creditworthy cosigner. Some graduate schools may have their own loan programs or a Perkins loan allocation.

I am scheduled to start repaying my student loans soon, but I am currently unemployed. What are my options? — Richard L.

There are several options for federal education loans.

The income-based repayment plan bases your monthly payments on a percentage of your discretionary income. Discretionary income is based on the amount by which your adjusted gross income (AGI) exceeds 150% of the poverty line. If your income is at or below 150% of the poverty line your monthly payment will be zero. AGI is based on the prior year’s income tax returns. However, during the first year you elect to use income-based repayment or if there has been a drop in your income the lender will require you to complete a form documenting your current income.

Another option is to use the economic hardship deferment. This suspends your repayment obligation for up to 3 years if you are unemployed or have very low income. The government will pay the interest on any subsidized Stafford loans (or the portion of a federal consolidation loan that repaid subsidized Stafford loans). The interest on unsubsidized loans continues to accrue and is capitalized (added to the amount owed).

If you’ve already exhausted your eligibility for the economic hardship deferment, you may be able to get a forbearance for up to 5 years. The difference between a deferment and a forbearance is that the government does not pay the interest on subsidized Stafford loans in a forbearance. Instead you are responsible for the interest on all your loans and it will be capitalized if you decide to not pay it during the forbearance.

Options for private student loans are more limited. Most lenders will offer forbearances in three month increments for up to a year in total duration. Some lenders charge a fee for a forbearance. You are more likely to get a forbearance if you agree to make interest-only payments during the forbearance instead of capitalizing the interest. The economic hardship deferment and income-based repayment are not available for private student loans.

See Trouble Repaying Debt for additional options.

One of my current colleges says I should consolidate my loans since I have reached my subsidized limit and also have very little left in unsubsidized. They say that this will allow me to get more subsidized Stafford loans. Will I have to start repaying the loans if I consolidate? Will I qualify for more money? — Amanda H.

This advice is not accurate. The percentage of a consolidation loan attributable to an underlying subsidized or unsubsidized Stafford loan is counted against the corresponding aggregate loan limits. Consolidating your loans will not make you eligible for additional Stafford loans, subsidized or unsubsidized. This is per the regulations at 34 CFR 682.204(j) and 34 CFR 685.203(h).

Perhaps the college is confused about the treatment of capitalized interest? Capitalized interest is not counted against the aggregate limits, regardless of whether the loans have been consolidated or not.

You can consolidate your loans only if they are in the grace period or repayment period. You cannot consolidate them if you are still in an in-school period. If you consolidate your loans in the grace period you will lose the remainder of the grace period. Repayment begins within 60 days of consolidating the loans. However, if you re-enroll in college you may be eligible for an in-school deferment on the loans.


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