2 options if you can’t afford your Student Loan

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If you struggle paying your student loans, contact your lender and ask about the following two programs.

Income-Based Repayment (IBR)

If you qualify for IBR, your maximum monthly payments will be 15% of discretionary income, using a specific formula. Under the newer Pay As You Earn (PAYE) program available to recent borrowers, the cap is 10% of discretionary income. Payments can be as low as $0 if you are unemployed. Balances will be forgiven after 10, 20 or 25 years, depending on the program you are in and whether you work in a qualified public service job.

With subsidized loans in IBR, the government will pay up to three consecutive years of interest that accrues but is not repaid. With unsubsidized loans, interest accrues. In both cases, interest is capitalized if you are determined to no longer have a “partial financial hardship,” or if you drop out of IBR.

Income-Contingent Repayment (ICR)

Under this plan, borrowers’ monthly payments are pegged to income, family size and the amount owed. After 25 years, any remaining balance is forgiven. (Or after 10 years for public service loan forgiveness.) Accrued interest is capitalized annually.

Understanding Student Loans (Terminology)

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Now that we have a basic understanding of the types of Student Loans, let’s break down the terminology that relates to your loan.

Deferment

Student loan deferments allow you to postpone paying back your loans in certain circumstances. This is an extremely important strategy, particularly since interest does not accrue for subsidized loans during deferment periods. Interest does accrue on unsubsidized loans. If you can afford it, you should consider paying the interest while you are in a deferment period.

You are eligible for student loan deferments only if you have not yet defaulted on your loans.

Deferment options for federal loans vary depending on the type of loan and date the loan was incurred. You can get the following deferments for most loans:

  • In-school deferments for at least half-time study;
  • Graduate fellowship deferments;
  • Rehabilitation training program deferment;
  • Unemployment deferment not to exceed three years;
  • Economic hardship deferment, granted one year at a time for a maximum of three years; and
  • Military deferment.

There are a number of other deferments available in the Perkins program only, including:

  • Full-time service for law enforcement and correction officers, and
  • Volunteer service such as the Peace Corps.

You can request a deferment form from your loan servicer.  You should contact your guaranty agency or school if you have a different type of loan. You should continue paying while your application is pending.

The deferment options above are for federal government loans.  Many private lenders also offer deferments.   These vary by program.  Read your loan agreement carefully or ask your lender about options that may be available for your private loan.

Economic Hardship Deferment

The economic hardship deferment is granted one year at a time for a maximum of three years.

The first three qualification categories are “automatic” as long as you can provide supporting documentation. These three categories are:

  1. Previous qualification for economic hardship deferment under another federal loan program.
  2. Receipt of federal or state public assistance benefits. This includes payments under a federal or state public assistance program such as TANF, SSI, Food Stamps, or state general public assistance.
  3. You qualify if you are serving as a Peace Corps volunteer.

You can also qualify based on your income you are working full-time and your monthly income does not exceed the larger of A) The federal minimum wage rate or B) 150% of the poverty line income for your family size and state. (In 2014, the poverty line for a family of two living in the 48 contiguous states was $15,730).

Unemployment Deferment

There are two ways to qualify for an unemployment deferment. The simpler way is to provide proof of eligibility to receive unemployment benefits. The other way is to show that you are diligently searching for full-time employment (defined as employment of at least thirty hours per week and expected to last at least three months). This second category requires you to certify that you are diligently seeking but unable to find full-time employment and in most cases that you are registered with a public or private employment agency. You may qualify under this second category whether or not you have been previously employed.

If you apply under the seeking full-time employment category, the initial deferment can be granted for a period that begins up to six months before the loan holder receives your request and can be granted for up to six months after that date. If you get the deferment based on your search for full-time employment and you want to extend it beyond the initial period, you must  certify that you have made at least six diligent attempts during the preceding six month period to secure full-time employment.

Each unemployment deferment may last for up to six months.  You must reapply to extend the deferment.  If you are applying under the seeking full-time employment category, you must certify that you have made at least six diligent attempts to obtain full-time employment in the last six months.  This deferment cannot be granted for a total of more than three years.

Military Service Deferment

This deferment is available in all three loan programs, FFEL, Direct and Perkins. It is available to military service members on active duty during a war, other military operation or national emergency, members of the National Guard called to active duty during a war, military operation or national emergency and reserve or retired members of the Armed Forces called to active duty during a war, military operation or national emergency.

This deferment may be granted based on a request from the borrower or the borrower’s representative.

There is no time limit on the military deferment. The eligibility period ends 180 days after the borrower is demobilized from active duty service.

Some borrowers called to active duty will not be eligible for military deferments.  To help cover this gap, there is a mandatory forbearance available to National Guard members who qualify for the post-active duty deferment (see below), but do not qualify for a military or other deferment.

Active Duty Student Deferment

This deferment should really be called “Post-Active Duty Deferment” because it is for borrowers who are enrolled in school when they are called to active duty and plan to re-enroll after they have completed their service.

This deferment is available in all three loan programs, FFEL, Direct and Perkins. Eligible borrowers include members of the National Guard and reserve or retired members of the Armed Forces called to active duty at the time, or within six months prior to the time, that they were enrolled in school. These borrowers may receive deferments for up to 13 months following completion of active duty military service and any applicable grace period.  The period expires at the earlier of a borrower’s re-enrollment in school or the end of the 13 month period.

Similar to the military service deferment the borrower must be on active duty to qualify for this deferment. Unlike the military service deferment, activation during a war or other military operation or national emergency is not required.

 

Grace Period

You usually do not have to start repaying your loans right away. This “waiting period” after graduation and before repayment begins is known as a “grace period.”

Grace periods can be extended for up to three years (in addition to the standard six months) if a borrower is serving on active duty in the Armed Forces. Repayment begins after the grace period is over. You can only use the grace period once per loan, so if you go back to school after your grace period ends, that loan will not be eligible for a second grace period upon graduation from the subsequent program. New loans will be eligible for a grace period.  Be advised that you lose any remaining grace period if you consolidate your loans.  Also be advised that there is not a second grace period if you already used up your original one.  For example, if you have an in-school deferment on a loan that entered repayment at an earlier date (before you returned to school) and you graduate, drop below half-time enrollment or withdraw, you will be required to begin making payments right away on the loan because the original six month grace period was already used up.

Stafford Loans

You have six months to begin repayment on Stafford loans after graduation, or after you leave school or drop below half-time enrollment. Older Stafford Loans may have a longer grace period. You can also request a shorter grace period if you want to start repaying sooner, and avoid unnecessary interest capitalization. “Capitalization” is when interest that accrued during the grace period or other deferment is added to the loan principal when repayment begins.

Interest will not accrue while you are in school, and during the grace period for subsidized Stafford loans. The government pays the interest on these loans. This is not the case for unsubsidized loans. If you have unsubsidized loans, you may either pay the interest during the in-school deferment and grace periods, or the interest will be capitalized when repayment begins.  For loans made for periods of enrollment beginning on or after July 1, 2012, graduate and professional students will no longer be eligible to receive subsidized loans.  Loans made prior to this date are not affected by this change.

PLUS Loans

There is no grace period for PLUS loans. Repayment on PLUS Loans generally must begin within sixty days after the final loan disbursement for the period of enrollment for which the loan was borrowed.  However, deferments are available for PLUS loans disbursed on or after July 1, 2008.   These graduate and professional student PLUS borrowers may defer repayment during the six months after they leave school.  The additional six months will automatically be applied when the graduate PLUS borrower requests an in-school deferment.

A parent borrower with loans disbursed on or after July 1, 2008 may defer repayment while the student on whose behalf the loan was taken out is in school.  Parent PLUS borrowers may also defer repayment for six months after the student on whose behalf the loan was borrowed is no longer in school or if the parent is also a student, six months after the day that the parent is no longer in school.  Parent PLUS borrowers must apply for this deferment.

Because PLUS loans are unsubsidized, interest will accrue during the deferment period.

Perkins Loans

The grace period for Perkins loans is nine months. Perkins loan borrowers attending less than half-time should check with their financial aid administrators to determine their grace periods. Perkins borrowers should not be charged interest during the grace period.

Private Loans

Private loans may also have grace periods. These are sometimes called “interim periods”. You should read your loan agreement carefully and ask your lender about when repayment begins. Interest will generally accrue while you are in the grace period. Once you enter repayment, the accrued interest will usually be capitalized, meaning that it will be added to your principal balance. You can also choose to pay the interest during the grace period and avoid capitalization.

 

Forbearance

Forbearance is one of two main ways to delay repayments on a student loan, the other being deferment. The main practical difference is that interest continues accruing during the delay period with forbearance, which isn’t always the case with deferment. Usually forbearance is at the discretion of the lender, while deferment is automatically based on specific criteria. Generally, forbearance is an option available when the person is in poor health, is unlikely to be able to afford to pay the loan back in full by the scheduled completion date, or has such a low income that the scheduled monthly payments are 20 percent or more of his monthly income.

In contrast, a person who is temporarily disabled, on military service, in education or working in some other public jobs may be able to defer the loans.

People in some other public jobs may be able to cancel loans. If a person dies, or is permanently disabled and unable to work, the loan can automatically be cancelled.

In most circumstances, forbearance is not guaranteed. The borrower must apply for forbearance and the lender will assess whether or not to grant it.

In contrast, most of the eligibility requirements for deferment or cancellation are automatic, meaning that anyone who qualifies is guaranteed to receive such treatment if she applies for it.

The key principle of forbearance is that the loan continues to accrue interest during the forbearance period. The borrower has the option of paying the specific interest that accrues during this time. If he does not do so, the interest will be added to the total outstanding loan amount, thus having a compound effect.

In contrast, no interest accrues during a deferment period for a specific type of loan known as a subsidized Stafford loan: the federal government pays the lender an amount equivalent to the interest for the deferment period. With other types of loans, interest does accrue for the borrower during deferment.

Forbearance is granted for a one-year period, after which the borrower must reapply. It will again be up to the lender to decide whether to continue the forbearance.

In contrast, with a deferred loan the borrower will usually be guaranteed a successful renewal application if he still meets the conditions. However, deferment for a specific reason may have a total time limit, after which it cannot be renewed.

 

Delinquency

Student loans default and delinquency policies and practices vary depending on the type of loan.  You also need to know the important difference between being delinquent and being in default.  The government collection powers and your options to deal with student loan problems depend on whether you are delinquent with your payments or whether you are in default. The government’s extraordinary collection powers kick in only after you default.

You are in default on most federal student loans if you fail to make payments for nine months. The entire loan balance becomes due once you default. A delinquency period begins on the first day after you miss a payment. Your loan holder has certain responsibilities once you are delinquent. During the first 15 days, they must send at least one written notice or collection letter.

The notices and other tactics intensify the longer you are delinquent. If the delinquency goes on for nine months, your loan holder will declare you in default.  If you are having trouble making payments, contact your lender sooner rather than later. If you are starting to have problems, you should work with your loan holder to postpone payments or figure out another way to get temporary relief. It is your responsibility to notify your loan holder if you move to a new address.

Understanding Student Loans

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Many of our clients are overwhelmed with student loans and don’t have a very strong grasp with understanding the structure of the loan, type of loan, repayment options, forbearance, default, loan terms, or deferment. Over a period of several Blogs, I will make every attempt to break down student loan terminology and describe the intricacies of the major types of loans.

Subsidized Stafford Loans

The federal government will pay the interest on your Subsidized Stafford Loans under certain circumstances.

Undergraduate independent and dependent students can borrow a maximum of $23,000. As of July 1, 2012, graduate students can no longer receive Federal Subsidized Stafford Loans. They are still eligible for Federal Unsubsidized Stafford Loans.

Repayment Terms

  • Repayment begins 6 months after the borrower initially graduates, withdraws, or drops below half-time enrollment.
  • Under certain conditions, the borrower can request a deferment—a repayment postponement—during which the federal government will pay your accruing interest on your behalf.
  • Borrowers also may be able to postpone repayment of their loan payments with forbearance. However, interest still accrues and will capitalize if you do not pay it during forbearance.
  • Typically, you have up to 10 years to complete repayment; however borrowers can also choose from various repayment plans.
  • There are no penalties for prepayment or finishing repayment ahead of schedule.

Interest Payment

Interest is generally paid by the federal government while you are:

  • In school.
  • In a grace period. During the grace period, payments are optional, but any interest that builds up will be added to the principal amount of your loan (capitalized) when the grace period ends.
  • In an approved deferment period.

 

Unsubsidized Stafford Loans

These loans are available without regard to need, but you must pay the interest on them the entire time.

Unsubsidized Stafford loans are not based on financial need.

Loan Limits

Dependent Undergraduate Students

Each year, dependent undergraduate students can borrow a base amount in either subsidized or unsubsidized Stafford loans. The loan type depends on the student’s need, which is calculated by the U.S. Department of Education.

The base amount can be:

  • Up to $3,500 in the borrower’s first year of school.
  • Up to $4,500 in the second year.
  • Up to $5,500 in the third year and beyond.

However, if the student’s aid has not exceeded the cost of attendance, the student can be eligible for up to an additional $2,000 per year in unsubsidized funds.

With an additional $2,000 unsubsidized loan per year, dependent undergraduate students can borrow up to a maximum of $31,000 in Stafford loans. Of that $31,000, no more than $23,000 may be in subsidized funds.

Undergraduate Independent Students and Dependent Students Whose Parents Are Unable to Obtain a PLUS Loan

Undergraduate independent students and dependent students whose parents are unable to obtain a PLUS loan can borrow a base amount of Stafford loans. These can be either subsidized or unsubsidized, depending on the student’s need.

The base amount can be:

  • Up to $3,500 in their first year of school.
  • Up to $4,500 in their second year.
  • Up to $5,500 in their third year and beyond.

Additionally, if the student’s aid has not exceeded the cost of attendance, the student can be eligible for unsubsidized funds of:

  • Up to an additional $6,000 in their first and second years.
  • Up to an additional $7,000 in their third year and beyond.

Undergraduate independent students and dependent students whose parents are denied PLUS loans can borrow up to a maximum of $57,500 in Stafford loans.

Graduate Students

  • As of July 1, 2012, all Stafford loans for graduate students are unsubsidized.
  • Students may borrow up to $20,500 per year.
  • Total Stafford loans, including undergraduate loans, may not exceed $138,500.
  • There are different aggregate borrowing limits for health profession students.

Repayment Terms

  • Repayment begins 6 months after the borrower graduates, withdraws, or drops below half-time enrollment.
  • Typically, the borrower has up to 10 years to complete repayment; however borrowers can choose from various repayment plans.
  • There are no penalties for prepayment or finishing repayment ahead of schedule.
  • Under certain conditions, repayment of a borrower’s loans can be postponed with a deferment or forbearance. Interest will continue to accrue during periods of deferment or forbearance.

Perkins Loans

These loans are available to students with exceptional financial need.

Who Can Borrow

Undergraduate and graduate students who demonstrate exceptional financial need,

Loan Limits

  • Undergraduates can borrow up to $5,500 a year, for a maximum of $27,500.
  • Graduate students can borrow up to $8,000 per year, for a maximum of $60,000.

Repayment Terms

  • Repayment begins 9 months after a borrower graduates, withdraws, or falls below half-time enrollment.
  • The borrower has up to 10 years to complete repayment.
  • Borrowers receive limited options for repayment schedules, but they do have additional postponement options like Perkins-specific deferments and forbearance.
  • Borrowers should contact their school or servicer to apply for a postponement.
  • Your servicer is usually different from your other federal loans. It could be your school or a company chosen by your school.

Interest

The interest rate is fixed at 5%. Interest is paid by the federal government while the borrower is:

  • In school.
  • In a grace period.
  • In an approved deferment period.

Parent PLUS Loans

Parent PLUS loans are borrowed by a student’s parents.

Borrowers must have credit in good standing. A co-signer may be required.

Parent PLUS loans are not based on financial need.

Loan Limits

Parents can borrow up to the total cost of attendance at the student’s school (as determined by the school), minus all other aid received.

These loans have no annual or total borrowing limit.

Repayment Terms

Typically, borrowers have up to 10 years to complete repayment; however borrowers can choose from various repayment plans.

There are no penalties for prepayment or finishing repayment ahead of schedule.

Under certain conditions, borrowers can postpone repayment by requesting a deferment or forbearance. Interest will continue to accrue during periods of deferment or forbearance.

For loans disbursed on or after July 1, 2008, the borrower can choose to start repayment:

  • No later than 60 days after the loan is fully disbursed.
  • Upon request, 6 months after the student for whom the loan was borrowed graduates, withdraws, or drops below half-time enrollment.

Interest Rate

Parent PLUS loan rates are fixed. The rate for new loans is set each year on July 1.

Grad PLUS Loans

Grad PLUS can help pay for the additional cost of graduate school.

Loan Limits

Borrowers can borrow up to the total cost of their education, minus all other aid received.

These loans have no annual or total borrowing limit.

Repayment Terms

For loans disbursed on or after July 1, 2008:

  • Repayment starts 6 months after the student drops below half-time enrollment.

There are no penalties for prepayment or for finishing repayment ahead of schedule.

Under certain conditions, borrowers can postpone repayment by requesting a deferment or forbearance. Interest will continue to accrue during periods of deferment or forbearance.

Interest Rate

The interest rate for Grad PLUS loans is the same as the rate for Parent PLUS loans.

Consolidation Loans

Consolidation loans combine multiple loans into a single loan.

Who Is Eligible

Borrowers with one or more eligible federal student loans.

Loan Limits

None.

Repayment Terms

  • Based on your total education loan debt (including most private education loans), you could extend your repayment to a maximum of 30 years.
  • Extending repayment may increase the amount of interest paid over the life of the loan.
  • Consolidation loans can be reconsolidated when there are additional eligible federal education loans.
  • Federal Family Education Loan Program (FFELP) borrowers can reconsolidate into the Direct Loan (DL) program to gain access to military benefits and Public Service Loan Forgiveness.
  • Under certain conditions, the borrower can postpone repayment by requesting a deferment or forbearance. Interest will continue accruing on unsubsidized portions (but not subsidized portions) of a Consolidation loan during periods of deferment.
  • There are several repayment plans available.
  • There are no penalties for prepayment or finishing repayment ahead of schedule.

Interest Rate

Consolidation loans have fixed interest rates.

The interest rate is calculated by taking the weighted average of the interest rates on the loans being consolidated and rounding up to the nearest 1/8 of a percent.

Keep in mind that rates are capped at 8.25%.

Institutional, Private, and State loans

Outside the federal loan program, there are other lenders.

Institutional Loans

  • These loans are similar to private loans.
  • They are non-federal aid provided directly by your school.
  • Your servicer may be your school or an agency hired by your school.
  • Repayment options will vary, as will interest rates.
  • If you have institutional loans, contact your school to learn more about the terms of these loans.

Private Loans

  • Also called “alternative loans.”
  • Unlike federal student loans, private loans are not funded or otherwise processed by the federal government.
  • Either the borrower or a parent can take out a private loan.
  • These loans have a variety of interest rates, payment structures, and lengths of time to repay.
  • Private loans do not have many of the repayment and deferment options that are available with federal loans.
  • Private loans may be an important option if the borrower does not qualify for other forms of aid.

State Loans

  • State loans are provided through state-funded programs and are not affiliated with federal loan programs.
  • These loans’ interest rates may vary depending on the state you are in.
  • State loans have different benefits and requirements from federal loans, but they may offer more benefits than private loans.
  • Contact your state’s office of education to learn more.

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