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Repaying student loans
By Suze Orman
FOR ALL THE required classes needed to obtain a
college degree, there is one glaring omission: how to
repay your student loans.
If you have a private student loan, please check
in with your lender to make sure you know what is
expected. Private loans typically are variable rate,
like a credit card. Any slip up on your payment of a
private loan can send your interest rate skyrocketing
and trigger costly penalties. In the event of the borrower dying, private loans are not forgiven, as they
are with federal loans. And with private loans, there
is no such thing as income-dependent or extended
payments, as there are with federal loans.
So here’s a crash course on federal loans, such as
Perkins and Stafford loans, which are fixed-rate.
Repayment is a priority
Make paying off your student loans your No. 1
priority. The penalties for falling behind on student
loan payments are fierce, and student loan debt is
pretty much inescapable. Even if you were to take the
extreme step one day of filing for bankruptcy, your
student loan debt would not be wiped out.
Credit card debt, mortgage debt and auto loan
debt can all be discharged in bankruptcy. But 99. 9
percent of the time, student loans cannot. They stick
to you like Velcro, for the rest of your life.
I know you’re not thinking about retirement
right now, but I want you to realize that if you still
have unpaid student federal loans way down the
road, your Social Security payouts will be docked.
You typically have just six months from the
time you leave school to begin repaying your federal loans. After this so-called grace period, you
are expected to begin repayment, even if you
don’t have a job. And be aware that interest on
Stafford loans will continue to accrue during your
grace period. Bottom line: The sooner you start
repayment, the better.
Ask for an extension if it’s truly necessary. If
you absolutely, positively can’t handle any payments just yet, you must formally ask for your
account to be granted a deferment or forbearance.
I can’t stress this enough: You must ask for a delay;
if you just ignore the loans you are going to be hit
with costly penalty fees, and the worst-case scenario
is that you end up in loan default. That will be
disastrous for your credit rating.
You have two options for delaying payments;
you must apply for both options. The general rule
is to always apply for deferment first, and if that
isn’t granted, try for forbearance.
Deferment. If you have yet to land a job, you
may be eligible for deferment (for up to three
years), though, depending on the type of loan you
have, interest may continue to be applied to the
Forbearance. Discretionary forbearance can
be granted if you’re ill or experiencing a financial
hardship (layoff, illness impacting wage earner, etc.)
or a military deployment. With this option your
payments may be suspended or reduced for up to 12
months, though interest generally continues to be
added to your loan balance.
Do it in a decade
Aim to have the loan repaid in 10 years. There
are a variety of different payback plans for federal
loans, with the payment period ranging from 10 to
25 years. As tempting as it can be to opt for the longer repayment schedule—spreading out payments
over many more months lowers your monthly payment—you will also get stuck paying a lot more
interest over the longer term.
Choosing a repayment option that is tied to your
current income is also very tempting. Qualifying
borrowers have their monthly payments set at a very
low percentage of their income. But there are two big
catches: The longer you take to repay, the more you
end up paying in interest charges than if you had
stuck with a 10-year payback.
And even if you qualify to have the remaining
balance forgiven (depending on the plan, that can be
after 20 or 25 years of on-time payments), be aware
that any forgiven amount must be reported as taxable income. My advice: Stick with the standard
10-year payback option, unless you are heading for a
career in public service.
If you opt for a full-time career working for a
government entity (teaching, law enforcement, etc.)
or approved nonprofit, you may be able to reduce
your total loan obligation. Under the Public Service
Loan Forgiveness Program, any remaining balance
after you’ve made on-time monthly payments for 10
years (120 payments) will be forgiven, with no
income tax owed on the balance whatsoever. If you
plan to spend at least 10 years in a career that quali-fies for this loan forgiveness program, it makes
sense to opt for the income-based repayment plans
(payback periods of 20 to 25 years).
My last bit of advice: Get schooled on student
loan repayment ASAP. A good source of information is at studentaid.ed.gov; click on “How to Repay
Your Loans” at the top of the page to be linked to a
trove of important information on how to ace your
student loans. C