A Quick Guide to Successful Debt Management and Default Prevention
Step One: Determine what you owe and to whom
You can access information about your federal loans at http://nslds.ed.gov. There you can track your loans until they are paid in full, which is key if you are making multiple payments to multiple parties. Payment on federal loans begin six months (nine months for Perkins Loans) after you depart the university, giving you enough time to determine how you will repay.
For private loans, you can request a free credit report, which will give you information about any non-federal loans you may have received during the course of your education.
Step Two: Decide if consolidation is right for you and then determine what repayment plan is best
Consolidation allows borrowers to combine their federal loans, which may have different interest rates, into one monthly payment with a fixed rate. It may give you a longer term of repayment, which can be useful as you begin your career. Consolidation can also make you eligible for the Income Contingent Repayment Plan and possibly loan forgiveness through the Public Service Loan Forgiveness program.
Consolidation isn't for everyone, however. Your interest rate may increase slightly because the interest is determined by a weighted average of the loans you are consolidating. You will want to carefully consider if consolidating all your federal loans (including Perkins and/or Health Professions Loans with the exception of the Primary Care Loan) is beneficial. Additionally, the same benefit that allows you to extend your repayment will mean that you end up paying more in interest in the long run. Before you consolidate, speak with your lender(s). Some questions to ask include:
- What is the interest rate, and is it fixed or variable?
- Are there any loan fees?
- How much will monthly payments be?
- What is the overall cost of the loan?
- Are there any repayment benefits or incentives?
- Will I lose any benefits by consolidating?
Once you have these answers, then you can compare the terms and benefits of your current loans with the consolidation loan to make sure it's the right fit for you.
Loan Repayment Plans
Whether or not you choose to consolidate, you will still need to consider how you will pay back your federal loans. There are many payments plans available for you to choose from.
- Standard Repayment: Borrowers pay a fixed monthly amount (minimum $50) for a loan term of up to 10 years. This program is available for both FFELP and Direct Loans.
- Graduated Repayment: Borrowers begin with lower payment amounts, which gradually increase every two years, and has a loan term of 10 years. This program is available for both FFELP and Direct Loans.
- Extended Repayment: Borrowers who have borrowed at least $30,000 pay a fixed monthly amount like the standard repayment plan, but the loan term is extended to 25 years. This reduces the size of the loan payments but increases the total amount paid over the lifetime of the loan. This program is available for both FFELP and Direct Loans.
- Income-Based Repayment (IBR): Borrowers who are experiencing financial hardship will have their payments (minimum $0) are based upon their income, family size, and state of residence for a loan term of 25 years, after which the remaining balance is forgiven. Borrowers must reapply each year and provide consent for the IRS to provide proof of tax information (though alternative documentation may be accepted if the borrower does not file). If a borrower leaves the program, he or she will go into the standard repayment plan and the unpaid interest capitalizes. This program is available for both FFELP and Direct Loans but excludes PLUS Loans and Consolidations used to pay off a PLUS Loan.
- Income-Contingent Repayment (ICR): Borrowers' payments (minimum $5) are based upon the borrower's income, family size, and total amount of debt with a loan term of up to 25 years, after which the remaining balance is forgiven. This program is available for Direct Loans only. [The difference between ICR and IBR is that ICR requires no financial hardship for a borrower to qualify.]
- Income Sensitive Repayment: Borrowers' payments (minimum $0) are based upon their income (a percentage of gross monthly income) with a loan term of 10 years. This program is available for Direct Loans only.
- Alternative Repayment Plan: This is a plan of last resort to help borrowers experiencing extreme hardship and who have become behind in payments. It is available only to Direct Loan borrowers and is tailored to an individual's specific circumstances.
Step Three: Determine if you might be eligible for loan forgiveness programs
Under certain circumstances, a loan may be partially or fully cancelled through loan forgiveness. Plans include:
- Teacher Loan Forgiveness: Available to borrowers who become full-time teachers for five consecutive years in an elementary or secondary school that serves students from low-income families (including qualifying teaching services operated by an educational service agency). Up to $17,500 in principal and interest on their FFEL or DL program loans may be forgiven.
- Public Service Loan Forgiveness: Borrowers who are employed fulltime in the public service while making payments may have their loans forgiven after they make 120 full payments in either IBR, ICR or standard repayment plans. Public service jobs include emergency management, government, military service, public safety and law enforcement, public health, public education, early childhood education, social work in a public child or family service agency, public services for individuals with disabilities or the elderly, public interest legal services, public librarians, school librarians, and other school based services, and employees of tax exempt 501(c)(3) organizations. This program is available on to DL loans only.
- Service as a Civil Legal Assistance Attorney: Borrowers may receive up to $6,000 in student loan repayment for each year of completed service as a civil legal assistance attorney up to an aggregate total of $40,000. This program was closed in 2010 after the Department of Education committed all of its $5,000,000 allocation through a first-come, first-served application process. It is not expected that this program will continue to receive funding.
- Service in Areas of National Need: This program has never been funded by Congress and is not expected to receive funding in the future.
Additionally, the Perkins Loan may be forgiven under certain circumstances as outlined in your promissory note. For more information, contact your lender or servicer.
Step Four: Stay on top of your loans
If you've accepted loans to help pay for your education, then you've made a long term investment in your future. Defaulting on your federal loans will have serious consequences, such as:
- damaging your credit score to make it harder for you to buy a car or a house
- making you ineligible for additional federal aid if you decide to return to school
- deducting loan payments from your paycheck
- withholding your state and federal income tax returns to apply toward the amount you owe
- being sued.
To prevent default, take charge of your financial future. Make sure to inform your servicer/lender if you change your name, address, or telephone number. Remember that you can change your payment due date and your repayment plan to meet your needs (though no more than once a year). And finally, if you're having trouble making payments on your loans, contact your loan servicer/lender as soon as possible. They can provide you with options that can help, such as deferment (an approved period of time when no payments are required on your student loan. Interest may or may not accumulate during deferment) and forbearance (a temporary reduction or postponement of student loan payments if you are experiencing financial hardship).
There is also help available if you are experiencing difficulty with Private Educational Loan Repayment. The Consumer Financial Protection Bureau can help you if you are experiencing billing or collection disputes. For more information, visit their website at www.consumerfinance.gov/complaint or call toll free at 1-800-411-CFPB.
The University of South Carolina offers a Financial Literacy Program that provides resources to help you manage your money. Visit http://www.sa.sc.edu/ssc/flp/ for more information.
Another resource for learning the basics of personal finance, including budgeting calculations, can be found at MyMoney.gov.
You can request a free copy of your credit report every year from each of the three nationwide credit reporting bureaus: Equifax, Experian, and TransUnion. Visit AnnualCreditReport.com or call 1-877-322-8228.
The National Foundation for Credit Counseling can help you if you find yourself in a severe financial bind. Visit NFCC.org or call 1-800-388-2227 to locate a free or low-cost credit counseling agency near you.
The Department of Education's Default Resolution Group provides a website (http://www2.ed.gov/offices/OSFAP/DCS/index.html) that will help you address your defaulted student loan.