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Repayment Begins for Students Who Graduated in May and June

Mark Kantrowitz

October 26, 2011

What If You Can’t Afford to Pay?

If you can’t afford your monthly loan payments, call your lender to discuss the options for financial relief.

Federal education loans provide more options than private student loans.

If you have a short-term financial difficulty, you might consider using a deferment or forbearance, which temporarily suspend the requirement to make payments on the loan. With a deferment the government pays the interest on subsidized loans, while the borrower is responsible for the interest on unsubsidized loans. With a forbearance the borrower is responsible for the interest on both subsidized and unsubsidized loans. The interest will be added to the loan balance if the borrower does not pay it as it accrues. (Try to make interest-only payments during a deferment or forbearance to keep the loan from growing larger.) The economic hardship deferment is limited to 3 years and forbearances to 5 years. (Private student loans offer forbearances in quarterly increments for up to a year in total duration. Some lenders charge a $50 fee per loan per quarter for a forbearance.)

If you have a long-term financial difficulty or have been in a deferment or forbearance for more than a year or two, you should consider using an alternate repayment plan, like income-based repayment or extended repayment. These repayment plans reduce the monthly payment by increasing the term (and cost) of the loan. For example, increasing the repayment term on an unsubsidized Stafford loan from 10 years to 20 years cuts the monthly payment by about a third, but more than doubles the interest paid over the life of the loan. Generally, a borrower should consider an alternate repayment plan if the borrower’s total education debt exceeds the borrower’s gross income, and this situation is likely to persist for duration of the loan.

Extended repayment bases the repayment term on the amount of debt. Borrowers with $20,000 or more in federal student loans are eligible for a 20-year repayment term. Borrowers with $40,000 or more in debt are eligible for a 25-year repayment term. Borrowers with $60,000 or more in debt are eligible for a 30-year repayment term.

Income-based repayment bases the monthly payment on a percentage of the borrower’s discretionary income, as opposed to the amount owed. Discretionary income is the amount by which adjusted gross income exceeds 150% of the poverty line. If your income is less than 150% of the poverty line, your monthly loan payment is zero. Currently income-based repayment is based on 15% of discretionary income, with any remaining debt (including accrued but unpaid interest) forgiven after 25 years in repayment. Starting in 2014, the percentage will be 10% of discretionary income for new borrowers of new loans (current borrowers do not qualify), with any remaining debt forgiven after 20 years in repayment.

If you work full-time in a public service job while repaying the loans in the Direct Loan program through income-based repayment, the loan forgiveness occurs after 10 years instead of 20 or 25 years. Loans in the federally-guaranteed student loan program may be moved to the Direct Loan program at loanconsolidation.ed.gov even if you previously consolidated your loans. Public service loan forgiveness is available only for federal student loans. Parent and private education loans are not eligible.

Private student loan programs do not offer income-based repayment, but may offer extended repayment. However, extended repayment typically cuts the monthly payment on a private student loan by less than 10%, not offering much relief.

Unfortunately, increasing the term of the loan means that you will still be repaying your own student loans when your children enroll in college. This will make it more difficult for you to save for your children’s college education. You will also be less willing to borrow for their education since you’ll still be up to your eyebrows in debt.


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