Student Loan Repayment after Graduation, Leaving School, and Before Entering the Work Force
Time to Pay Up...
College students use several forms of financial aid to meet higher education expenses. Grants and scholarships are preferred, because money that is awarded for college does not require repayment. Landing merit scholarships usually requires exceptional performance in academics, athletics or leadership activities. Grants, on the other hand, are need-based, so financial considerations are the primary qualifiers for receiving aid. Gift-aid, in either form, reduces students’ borrowing requirements for college, but most still utilize student loans to cover all the bases.
Public and private loan programs serve vital roles for university, community college, and graduate school students, but repayment is a condition of borrowing. Your Master Promissory Note forges a legal agreement between you and your lender, which establishes your commitment to pay the money back – with interest.
Each student loan program carries its own unique eligibility requirements and repayment conditions. Government-backed loans provide the best interest rates, and offer the greatest flexibility for repayment. Private loans are harder to get, because formal credit checks are required, but even bank loans provide flexible payment alternatives. Consider these options for managing and repaying student debt:
Repaying Your Federal Loans
Federal Direct and Stafford Loans are packaged with grace periods that last for six months after borrowers leave school. The six months cushion following college graduation provides a transition window to the workforce. Even if you don’t graduate, your clock starts ticking when you leave school.
Perkins Loans are special loans issued under the William D. Ford Federal Direct Loan umbrella, which are reserved for the neediest applicants. Perkins Loan repayment does not begin until 9 months after graduation, provided the program participant was enrolled in school full-time preceding repayment.
Depending on the repayment plan selected, repayment terms stretch between 10 and 25 years. Additional distinctions are made between Subsidized and Unsubsidized Direct Loans. Interest on subsidized federal student loans is paid by the U.S. Government during certain periods over the life of the loan. Unsubsidized Stafford Loan interest payments are due within 60 days of the loan disbursement. Many student borrowers opt to defer these payments, by adding interest to the loan principal, to be repaid at a later date.
PLUS Loans for Parents and Graduate Students
Parents and graduate students who borrow PLUS Loans do not enjoy automatic grace periods following school. Repayment of principal and interest begins within 60 days of the final loan disbursement. Parent PLUS borrowers, who are students themselves, qualify for six-month deferment of PLUS repayment. In addition, parents who borrowed for dependents’ education after 2008 are eligible to defer repayment until six-months after the student leaves school.
Avoid Default at All Costs
Student loan default carries consequences that are hard to shake, so every effort should be made to avoid falling behind on repayment. Government loan repayment allows for several strategies; each tailored to help students stay current with payments. When borrowers hold more than one federal student loan, they are eligible to consolidate them under the Direct Consolidation Loan Program. Better interest rates, and affordably structured payments result from consolidation, because repayment terms are extended. Smaller monthly payments keep financially challenged participants on-track, but with extended repayment, more interest is paid over the course of the loan term.
Federal loan repayment options provide affordable repayment solutions within your budget:
Several repayment options are available to facilitate timely payments from student borrowers. Payment options include a new method called ‘Pay as You Earn‘. Parents who borrow for their dependents’ education are not eligible for this option, but graduate students borrowing independently qualify. Pay as You Earn provides a viable alternative for students who are going through financial difficulties, but expect their repayment ability to improve. Other payment plans include:
- Standard – This 10-year repayment option allows for consistent, fixed monthly payments of at least $50 each.
- Graduated – Another 10-year repayment plan; this option starts with lower payments, which rise as graduates become financial established. As payments progress, they are adjusted upwards every two-years, until the debt is paid.
- Extended - Repayment terms extend as long as 25 years for this repayment approach. More interest is paid, but smaller payments allow borrowers to stay current on payments and avoid default.
- Income-Based Repayment - Earnings-based monthly payments represent a maximum of 15% of a borrowers income. Repayment can take as long as 25 years, during which monthly payments change regularly.
Repaying Private Loans
Student loan default is not an option under any circumstances, but failing to pay a commercial loan has far-reaching implications. Most college students require cosigners to secure private loans, so when payments are not made on time, it is not just the student who suffers. Cosigners who add their positive credit histories to student loans are subject to the same penalties as the students who borrow.
Like the Department of Education, private lenders want you to pay on-time, so they are willing to structure payment plans that work within your ability to pay. Always be proactive with your lender, so accommodations can be made - before credit sanctions set in. Once you default, it is hard to wipe the blemish from your record.
Student Loan Deferment and Forbearance
Some circumstances set the stage for temporary suspension of your student loan repayments. Deferment and forbearance delay payments until a later date, and depending on loan terms, the government might pay your interest in the meantime. Subsidized Loans and Perkins Loans qualify for government interest payments.
Student loan deferments are not automatic; most require borrowers to apply through their loan servicers. In addition; especially for Perkins program participants, students seeking deferments request them through campus financial aid offices.
Special circumstances allow students to utilize forbearance to stay on top of college debt. Illness and severe financial hardship qualify for temporary suspension or reduction of student loan payments. For up to twelve months, students are forgiven payments, but interest accrues throughout the forbearance period. Even subsidized loans are subject to capitalized interest during forbearance.
Mandatory forbearance creates automatic payment suspensions for certain students – like those serving medical or dental internships or residencies. Students whose monthly payment is more than 20% of their gross monthly income also qualify.