Explore the options for college loan repayment

PERSONAL FINANCE

October 28, 2008|By EILEEN AMBROSE | EILEEN AMBROSE,eileen.ambrose@baltsun.com

The grace period on federal student loans is almost over if you graduated from college in the spring. Soon you will have to start making payments.

But what if you still haven't landed a job? Or if you have, what if it doesn't pay much?

Federal loans offer a variety of repayment options that take hard times, low pay or other situations into account. You might be able to make reduced payments or even postpone them for a time while you get your finances in order. Flexible repayment methods, though, come at a cost. You generally will end up paying more interest over the life of the loan than if you repaid on the standard schedule of equal payments over 10 years.

Contact your lender or loan servicer to help you come up with a solution as soon as it appears you will have trouble making payments.

"Nobody wants you to default on your student loans," says Martha Holler, a spokeswoman with Sallie Mae.

You don't, either. Once you're in default - 270 days behind in payments - the penalties are harsh.

So what are your options?

Postpone payments

If you decide to go back to school, can't find work or have some other economic hardship, you can delay repayment by requesting a deferment.

The deferment will last as long as you are in school at least half-time. Deferments can last up to three years if you're unemployed or have an economic hardship, such as your income is near the poverty level or you're receiving public assistance.

If you have subsidized loans, meaning the government paid the interest on the loans while you were in school, the government will also pick up the interest tab while you are in deferment, Holler says. For this reason, a deferment might be the first choice for borrowers with subsidized loans, she says.

If your loans weren't subsidized, you're responsible for the interest.

Don't qualify for a deferment? Your lender may grant you a forbearance, where payments may be temporarily lowered or suspended.

"Most lenders have fairly liberal terms if you're willing to make payments but can't on a temporary basis," says Bob Murray, spokesman for USA Funds, the nation's largest student loan guarantor.

Forbearances typically are granted a year at a time, but can't exceed three years over the life of the loan.

Whether your loans have been subsidized or not, you will be responsible for the interest on the loan during forbearance, Murray says.

Borrowers often have the interest during a forbearance or deferment added to their balance so they can pay it later. Yet they are often surprised later to find that their debt has grown once the interest is tacked on, Murray says. Flexible payment plans

There are repayment plans if money is tight, but you still can afford to pay something back.

Consider a graduate repayment plan if you're starting your job at the bottom and expect to make big bucks later. Payments start low and get larger over the 10-year repayment period.

Some plans allow you to stretch payments over many years.

An extended plan allows those with more than $30,000 in student loan debt to draw out repayments for 25 years.

If your loans came through the government's direct lending program, you may be eligible for the income-contingent plan, where the size of your payments is tied to your income and debt. Any balance remaining after 25 years of payments is forgiven.

Federal loans that come through private lenders offer an income-sensitive option. You choose a monthly payment amount between 4 percent and 25 percent of your gross income, Holler says. Payments, which must be enough to cover accruing interest, are adjusted yearly. Loans generally must be repaid within 10 years, unless you receive a special forbearance. There is no loan forgiveness under this option.

(Starting in July 2009, an even more generous income-based repayment plan will be available for federal loans inside and outside the direct lending program. It, too, will forgive loan balances after 25 years of payments.)

You can also consolidate student loans and get as much as 30 years to repay, depending on the size of your debt.

Most borrowing by students is through federal loans. Private loans have some similar repayment options but not as many as the federal loan program.

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