10 Things to Know About Student Loans

How to keep track of your loans

Students, of course, are likely to be changing addresses, especially post-graduation. Parents and families may move as well when residency for local schooling options is no longer required or retirement beckons. So, be sure that you keep all of your student lenders (and servicers) informed and updated regarding your correct mailing addresses.

Especially if you’ve taken loans from numerous sources (for example, federal government–sponsored and private), total up the amount of debt accumulated. Debt surprises are rarely good! And be sure you are tracking all of your student loans as they may well be represented by multiple lenders and/or servicers by the time that college degree is earned.

What cosigners means for responsibility

At a minimum, families should have candid discussions about expectations and plans for repaying the student loans they’ve taken out. And, putting an agreement in writing is a fine idea to ensure that everyone is clear on the plan and so that there’s some accountability. That’s not to say that a written plan can never change; with discussion and agreement, your plan can be modified.

Know the loan terms

During the years of college, you should have received in the mail periodic updates on the outstanding student loans to which you have committed. For federal student loans, there are nonprofit processing companies (see the following list) that will keep you updated on your loans.

Here's a list of the loan processors that the U.S. Department of Education uses:

Generally, six months after graduation, federal student loan payments begin. You will definitely be hearing from the loan processor(s) for your loans around and continuously after that time.

How to use the auto-pay feature to save money

In addition to ensuring that you don’t have late payments or missed payments, most loan servicers or lenders will knock 0.25 percent or so off of the effective interest rate you’re paying for using auto payment. Some private lenders may reduce the rate a tad more than that.

One potential downside to putting your student loan repayments on auto-payment would be if it ever leads to your bank checking account being overdrawn. So, be sure you’re keeping a close eye on your account balance so that nasty surprise doesn’t occur.

Loan forgiveness conditions

Borrowers who are working in education, government, military, certain nonprofit organizations (not labor unions or partisan political organizations), law enforcement, or public health may be eligible for the Public Service Loan Forgiveness program.

To be eligible, borrowers must have completed 120 monthly (that’s 10 years’ worth) on-time payments. Borrowers must also be working full-time in public service and be paying their loans back under an income-driven repayment plan.

Unfortunately, the other conditions under which student loan balances can be discharged are less pleasant to consider. This can happen if the student-borrower suffers a long-term disability or passes away.

Your federal loan repayment options

A number of the repayment plans are sensitive to and based upon the student’s income relative to the amount of student loans he has outstanding. The repayment schedule, however, is not tailored to the local cost of living (strangely, there’s only an adjustment for students in Alaska and Hawaii). So, students turned workers who are living in high-cost urban areas like New York City, Chicago, Boston, Washington, San Francisco, and so on don’t get any special breaks. Your salary may be a bit higher working for employers in those high-cost areas, which actually undermines your chances and ability to qualify for income-based repayment plans.

Here, then, is a quick overview of the repayment plan options for so-called direct and federal family education student loans:

• Standard repayment: Your payment amount is fixed and allows the loans to be repaid in up to ten years. This plan works well for students who have a modest debt outstanding relative to their incomes and for whom the monthly payment amount fits within their budgets from the beginning of their working years after college.
• Graduated repayment: All borrowers may use this plan, which begins your payments at a reduced level compared with the standard repayment plan and then bumps them up every two years or so. This plan, which leads to somewhat higher total interest charges compared with the ten-year plan, still ensures the loans are paid off within ten years.
• Extended repayment: Students who have more than $30,000 in eligible loans outstanding may repay them on a fixed payment or graduated repayment basis over a period of up to 25 years. Thus, total interest paid will be significantly higher than under the ten-year repayment plans.
• Revised pay as you earn repayment (REPAYE): Under this plan, your monthly payments are annually set at 10 percent of your discretionary income, which is the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence. Payments are recalculated each year and based upon your updated income and family size (if you’re married, your spouse’s income and student loans are considered as well). Any undergraduate outstanding student loan balance will be forgiven if you haven't repaid your loan in full after 20 years.
• Pay as you earn repayment (PAYE): For this plan, you must have a high debt relative to your income. Your monthly payment will never be more than the ten-year standard plan amount. The details of the annual payment reset are the same as under the REPAYE option.
• Income-based repayment (IBR): This option is similar to PAYE except for the following differences. Your monthly payments will be either 10 or 15 percent of discretionary income, depending on when you received your first loans, but never more than you would have paid under the ten-year standard repayment plan. Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 years or 25 years, depending on when you received your first loans.
• Income-contingent repayment (ICR): Your monthly payment will be the lesser of 20 percent of discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income. For this plan, discretionary income is the difference between your annual income and 100 percent of the poverty guideline for your family size and state of residence. Any outstanding balance will be forgiven if you haven’t repaid your loan in full after 25 years.
• Income-sensitive repayment: Your monthly payment is based on your annual income, but your loan will be paid in full within 15 years.

There may be additional requirements to qualify for some of the repayment plans discussed here.

Cautiously consider refinance possibilities

When that situation occurs, it may be possible to refinance some of your student loans with a private lender (see my short list later in this section) at a lower interest rate than you are currently paying on those loans.

When contemplating a refinance, always compare the interest rate being offered on a new loan to the rate you are paying on your existing student loans. If the rate is lower on a new loan that would provide you with funds to pay off some of your existing student loans, then you should consider refinancing.

You also need to weigh and factor in any additional fees and charges — loan application fees, credit report fee, and so on — for a new loan you’re considering.

Beware the hucksters out there pitching you to refinance your student loans or rub out problems like your late payments if you fork over a hefty up-front fee to them. As I explain in the next section, if you’re behind in your payments, there are no-cost steps that you can take to address that with lenders and possibly get some relief.

How to ask for relief

There are two ways in which you may qualify for what is called “forbearance” of your federal student loans. There are two types of forbearance: general and mandatory.

With general forbearance, your federal student loan servicer decides whether to grant a request for forbearance. For this reason, a general forbearance is sometimes called a discretionary forbearance. You can request a general forbearance if you are temporarily unable to make your scheduled monthly loan payments for the following reasons:

• Financial difficulties
• Medical expenses
• Change in employment
• Other reasons acceptable to your loan servicer

If you’re still experiencing a hardship when your current forbearance expires, you may request another general forbearance. However, there is a cumulative limit on general forbearances of three years.

If you meet the eligibility requirements for a mandatory forbearance, your loan servicer is required to grant the forbearance. (Note: The mandatory forbearances discussed in the following list apply only to Direct Loans and FFEL Program loans unless otherwise noted.) You may be eligible for a mandatory forbearance in the following circumstances:

• AmeriCorps: You are serving in an AmeriCorps position for which you received a national service award.
• Department of Defense Student Loan Repayment Program: You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
• Medical or dental internship or residency: You are serving in a medical or dental internship or residency program, and you meet specific requirements.
• National Guard duty: You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.
• Student loan debt burden: The total amount you owe each month for all the federal student loans you received is 20 percent or more of your total monthly gross income, for up to three years. (Note: This mandatory forbearance type applies to Direct Loans, FFEL Program loans, and Perkins Loans.)
• Teacher loan forgiveness: You are performing teaching service that would qualify you for teacher loan forgiveness.

You must continue making payments on your student loan(s) until you have been notified that your request for forbearance has been granted. If you stop paying and your forbearance is not approved, your loan(s) will become delinquent and you may go into default.

How to make use of the student loan interest deduction

This deduction is not an itemized deduction, so anyone can take it on her Form 1040 as an “adjustment to income.” Each of your lenders should be able to provide you with a yearly summary that shows how much you paid in interest for the tax year. If you paid $600 or more in interest to a single lender, that lender is required to provide you with Form 1098-E, which documents the interest you paid for the year. Otherwise, ask your lender or loan servicer what you paid in interest for the year in question.

Pause your loans with a return to higher education

Private student loans and nonsubsidized federal student loans are, of course, a different matter. The interest keeps accumulating on those even if a former college graduate returns to school at least half-time. And, with some private student loans, you won’t be able to defer making payments and will need to make payments regardless of your student status.