Student Loan Repayment

Because student loans are financial aid award instruments that have to be paid back to the lending institutions that provide the money in the first place, it is imperative that considerations be made to the various repayment options that may be available for both student and parent borrowers.

Repayment options are essentially ways to modify the conventional process you would follow to pay back a student loan. So for example, a deferment can allow you to postpone when you have to make payments, while interest-only payments can allow you to reduce the monthly payment that is due for a certain time period.

The bottom-line is that the more repayment options that may come with a particular student loan, the better, as these can give you greater flexibility, and leniency when it comes time to pay back your education loan funding.

The Major Types of Repayment Options

While other financial aid professionals may group the variety of existing repayment options differently than I do, the following segmentation I think contains such options in the most efficient, and appropriate manner for both student, and parent borrowers.

• Deferment
• Forbearance
• Payment Adjustment Options
• Consolidation

Deferment

A deferment is when you have the option to delay when you are due to make payments on a particular student loan.

Deferments can be grouped into three major categories:

• In-school Deferment
• Grace Period Deferments
• Exit Deferments

In-school Deferment

In-school deferments do exactly what their name suggests, and can postpone when you have to make payments while you’re in school.

Most federal student loans and private student loans come with an automatic in-school deferment, that will allow you to not be required to make payments while you are taking classes.

Private education loans have a greater likelihood of not inherently making such a deferment available, and it is critical that you check with your lender before you apply to see if their loan product comes with such a deferment.

Grace Period Deferments

Grace period deferments are applied immediately when you graduate, leave school permanently, or after a specific leave of absence.

Most grace period deferments are given in six-month increments, and come with the majority of both federal, and private student loans, although again private loans carry the greater likelihood of not inherently coming with a grace-period deferment.

Exit Deferments

Once you have left school for good, and have exhausted your grace-period deferment, you may then have available what I like to call an exit deferment.

Exit deferments are given to students to utilize after they have left school, and need to postpone their payments for a particular amount of time.

They typically require you to activate them on a voluntary basis by contacting your lender or loan servicer, and the deferment time can range widely from a few months, to over a year.

Federal student loans usually come with an abundance of exit deferment time, although these types of deferments are much less common with private student loans, so it is best to contact your lender to find out what may come available with their particular loan product.

Forbearance

A forbearance is similar to a deferment in that can postpone when you are required to make payments on your student loan, although there is a slight difference with this repayment option.

With a forbearance the interest that has accrued up to the point that you initiate the postponement will be added to the principle of the loan, and therefore increase the overall amount of money you owe after the delayment period has come to an end.

This is why I recommend to students that they utilize their deferment time first, and if possible avoid having to utilize their forbearance time all together.

Federal student loans typically come with an abundance of forbearance time, while it can fluctuate greatly with regard to the specific private student loan product you end up receiving.

Payment Adjustment Options

Payment-adjustment options are repayment benefits that can allow you to reduce the amount of money you owe on a particular student loan on a monthly basis.

While they don’t postpone when you must make payments, or reduce the total amount of money you owe, they can lower your monthly payment by a significant margin, thus making it easier for you to afford your monthly payments.

While there are numerous payment adjustment options available, the major ones that I see utilized the most include the following:

• Interest-only Payments
• Income-adjusted Payments
• Graduated Payment Schedule
• Extended Payment Schedule

Interest-only Payments

Interest-only payments are a fairly self-explanatory payment adjustment option, as they can allow you to only have to make interest payments on your education loan for a particular amount of time.

This should lower your monthly payment by a significant amount, and although you won’t be paying down the principle of your loan, you will be keeping your loan current in the process.

Income-adjusted Payments

Income-adjusted payments can allow you to reduce your monthly payment when it may become too difficult to make on-time due to your level of income.

This will typically extend out the term of your loan, or increase your monthly payment amount later on down the line.

It can however provide you with some relief when you aren’t making as much as what you though you would, and it is best to personally contact your lender or loan servicer to see what kind of arrangement can be worked out for your own situation.

Graduated Payment Schedule

A graduated payment schedule is when your monthly payment amount slowly goes up over time, thus allowing you reduce your monthly payment amount for a period of time at the beginning of your repayment cycle.

The amount of time that the reduced payment is in effect for will be up to the particular arrangement you may have with your lender, as most lenders will be able to work with you on an independent basis provided they make available this payment adjustment option for your loan product.

Extended Payment Schedule

An extended payment schedule is something that can lower your monthly payment by extending out your loan term.

So for example you could extend your loan to a 25 year loan term if your original term was for 15 years if your lender made available such an option.

This should reduce your monthly payment, but will of course significantly increase the total amount of money you owe on your loan, so make sure you understand the full consequences of utilizing such a payment adjustment option before formally requesting one from your lender.

Final Words on Payment Adjustment Options

Payment adjustment options are great when you would prefer to make a lower payment, and wouldn’t mind either paying more in total for your loan when all is said and one, or be required to make payments for a longer period of time than normal, or both.

Federal student loans typically come with more payment adjustment options than private student loans, and it is important to find out what your private student loan lender may offer before you actually agree to accept the loan if these types of benefits are of interest to you.

Student Loan Consolidation

Student loan consolidation is when you are able to secure a new loan that is able to payoff one, or several of your current student loans.

Because you are getting a new loan, you will get a new interest rate and loan term, which can reduce your monthly payment, and provide you with the added convenience of only having to make one student loan payment per month, instead of having to make multiple payments.

Consolidating Federal Student Loan Debt

If you only have federal student loan debt, or have both private and federal debt and wish to only consolidate your federal education debt, I recommend that you look into the Direct Consolidation Loan that is made available by the Department of Education.

This is a federal student loan that is made via the Direct Loan Program that can consolidate all of your federal student loan debt that is not currently in “in-school” status.

The Direct Consolidation Loan is based on credit, and requires a separate application beyond the FAFSA that can be found at loanconsolidation.ed.gov.

Consolidating Private Student Loan Debt

If you have both federal and private student loan debt that you wish to consolidate, I recommend that you first apply for the Federal Direct Consolidation Loan, and then search for lenders that may be able to consolidate your private loan debt.

This is because the loan you receive via the Direct Consolidation Loan will be preferable than what you would be offered by most private consolidation lenders, and because it should be easier to get approved for this type of consolidation loan.

After consolidating your federal debt, you can then attempt to search for a lender that may be able to consolidate your private student loan debt, although these lenders are often difficult to find, and offer terms that would make the acquisition of such a loan make sense to only the most qualified borrowers.

Regardless, it is still something to look into if you have good credit and a solid income, as you could still possibly get approved and benefit from the added convenience, and hopefully cost lowering effect of a private consolidation loan.

Student Loan Delinquency and Default

When you don’t make your student loan payments on-time there is a chance your loan won’t remain current, and if you allow it to become a trend your loan could fall into delinquent status, or even worse, be defaulted on.

This is not something that you want to happen, and that is why I stress to student and parent borrowers to not hesitate to exhaust all of their deferment, and forbearance time, as well as their payment-adjustment options before allowing their loan to not remain current.

Student Loan Delinquency

When you don’t remain current on your student loan by missing monthly payments you risk having your loan fall into what is commonly referred to as a “delinquent” status.

Student loan delinquency is therefore the technical term that is used when your loan is no longer current, and if not taken care of immediately a delinquency can have several negative ramifications that include the following:

• Implementation of late fees and penalties
• Collection efforts—harassing phone calls, etc.
• Potential negative affect on credit score

These are clearly not things that you want to deal with, and that is why it is critical that you make every effort to keep your loan current.

Getting your student loan out of delinquency status typically requires the provision of back payments, along with perhaps the inclusion of several late fees and penalties.

Again the quicker you get your student loan out of delinquency status, the better, as the negative consequences and financial repercussions will be less severe the faster you can rescue your loan.

Student Loan Default

Defaulting on a student loan can happen after you have not made a payment on your loan for a consecutive amount of months.

This usually occurs after about 9 months for a federal student loan, and about 3-6 months for a private student loan, although don’t hold me to these figures exactly.

Defaulting on a student loan is a serious matter, and is something that cannot be fixed as easily as rescuing a student loan from a delinquency status.

Some of the common negative repercussions of defaulting on a student loan include:

• Added finance charges—late fees and penalties
• Elimination of certain repayment benefits
• Negative credit effects
• Enhanced collection practices
• Liability for being sued
• Loan may be sold, or turned over to a collection agency
• Potential for wage garnishment
• Tax returns may be retained for payments (federal loans)
• Loss of eligibility for federal student aid (federal loans)

The bottom line is that you never want to default on either a federal, or private student loan, although the negative ramifications of defaulting on a federal student loan are potentially much more severe.

Please try to work with your lender or loan servicer if you are seriously thinking that you may potentially default on a student loan, as the Department of Education and private lenders do not want a default either, and should be able to work something out with you provided that you are willing to make the effort.

Final Words on Paying Back Student Loans

Paying back student loans is a serious matter, and it can be made easier and simpler by understanding what the process entails, and what some of the common options are with regard to the postponing, and modification of payment schedules.

I urge you all to take the time to fully understand the terms of your loan, the available deferment and forbearance time, and whatever payment adjustment options may come with your loan before you formally agree to accept any federal or private education loan funding, as not doing so can have serious and unexpected negative consequences that may become irreversible down the line.

Student loan funding can help you get a higher degree and pursue the career of your dreams, but it does have to be paid back at some point, and this is why it is so important to understand your options and overall situation when that time comes.