Repayment: The Ins and Outs

Student debt has become a very pervasive element in the lives of many recent college graduates. According to the U.S. Department of Education, "16 percent of borrowers (graduates) were debt free after completing a bachelors degree. 51 percent had a debt of $10,000. 39 percent paying on debt deferred 4 years later."

Through increased availability of information pertaining to debt management programs and repayment opportunities, the Department of Education recorded that 2,380,741 borrowers, under the Federal Family Education Loan and the Direct Loan, entered repayment, compared to 130,036 that defaulted. This brings the national default average down to a record low 5.4 percent.

In an effort to avoid defaulting on student loans, the first step is conducting proper and thorough research so as to understand all the repayment options available. Since financial circumstances are highly individualized, it is only to be expected that repayment options must and do follow similar customized patterns.

The standard ten-year plan, in which borrowers pay a fixed monthly rate over a ten-year period, is not the only route to take. There is also the graduated plan, which stipulates that the borrower is able to make lower monthly payments towards the beginning of the plan with the payment amounts increasing incrementally.

The Department of Education reports: "Typically, Bachelors degree borrowers pay back $151.00 per month, whereas Masters degree borrowers pay back approximately $244.00 per month."

Extended repayment is available for borrowers that want to increase the period of time over which their payments will be made. Under this plan, the repayment period is extended up to twenty-five years. There are, however, a few qualifications that one must satisfy in order to be eligible for this program.

For instance, an interested debt ridden person must be a relatively "new" borrower with Stafford Loans totaling $30,000 or more received after October 7, 1998. Many people that opt for this plan do so in part because of its flexibility: payments can be either fixed or graduated.

One of the most customized plans is the income-sensitive repayment. Through this option, the monthly loan repayment amount is adjusted annually based on the participant's annual income.

Even though there are plenty of repayment options available to students immediately after they graduate, this does not mean that graduates must immediately enter into repayment.

One common avenue that graduates pursue is that of loan deferment. Nellie Mae, one of the nation's largest debt service providers, defines loan deferment as, "a temporary period during which no payment is due." While the borrower is in deferment, the federal government pays the interest that accumulates on Subsidized Stafford Loans. During the deferment period, the borrower is only responsible to pay the interest incurred as a result of any unsubsidized loans.

"In order to qualify for a deferment, a person must prove that they are returning to school for at least half time, be engaged in an approved fellowship training or rehabilitation training for the disabled, unable to find full-time employment, or experiencing economic hardship," reports Nellie Mae's debt management service, EDvisor.

Furthermore, the length of deferment varies from borrower to borrower based on the type of loan they utilize and the initial date of their awarded loans.

In addition to loan deferment, loan forbearance is another less common option. This is feasible when a person is "not financially able to make student loan payments, and do not qualify for a deferment, or if the borrower's education debt to loan ratio exceeds 20%," explains Nellie Mae's online EDvisor. Entering into a period of forbearance allows struggling debt-repaying graduates to reduce their monthly payments, or in some cases, temporarily pause them. Since interest continues to accumulate during forbearance, the borrower remains responsible for interest payments.

One of the most common and recommended dept-repayment strategies is that of consolidation. This option is ideal for borrowers with very high interest rates, loans from multiple lenders, or both. Consolidation is a way for people to streamline their bills in an effort to lower their monthly payments and answer to only one bill a month.

It's important to understand, however, that though the monthly payments become lower through consolidation, the life of the repayment period is increased and thus, in the long run, the total interest paid increases as well. The repayment period cannot exceed thirty years.

Depending on the situation, loan cancellation may be another possible option. This will only occur however with Federal Stafford, PLUS and Perkins loans in the event of the student's total and permanent disability or death, [sometimes] bankruptcy, the college or university attended by the student closes before they finished their program.

An important opportunity that students should be aware of is that Stafford loans totaling less than $5,000, or Perkins loans, may be forgiven should you choose to serve low-income families by teaching in particular elementary or secondary schools.

The Perkins program has further loan cancellation provisions for students entering a teaching profession, law enforcement, nursing, Peace Corps, or the military.

"If you find yourself with an unexpected financial windfall, consider paying one or more of your loans off immediately. There is no penalty for pre-paying," advises the Debt Management program offered by Nellie Mae.

Another strategy detailed by Mae's national debt service is to consider accelerating payments if the borrower enjoys an unexpected surplus of funds at the end of the month. While this will not alter the amount of the monthly payment, if done even on an occasional basis, over-paying will decrease the amount of long-term interest incurred.

A final rule of thumb for students looking to emerge from the cloud of debt: pay off the most expensive loan first, possibly by paying the interest on that loan while still in school.

By: Kate Ellis

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