Repaying Student Loans: Tips for Organizing, Managing Payments, and Avoiding Default
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Repaying Student Loans: Tips for Organizing, Managing Payments, and Avoiding Default
- 1. Overview of Repaying Student Loans Mark Kantrowitz Publisher of FinAid and Fastweb July 27, 2010
- 13. Impact of Extended Repayment Loan Term Reduction in Size of Monthly Loan Payment Increase in Total Life-of-Loan Interest Extended Repayment – 12 years 12% 22% (factor of 1.22) Extended Repayment – 15 years 23% 57% (factor of 1.57) Extended Repayment – 20 years 34% 118% (factor of 2.18) Extended Repayment – 25 years 40% 184% (factor of 2.84) Extended Repayment – 30 years 43% 254% (factor of 3.54) Impact of extended repayment on monthly loan payment and total interest paid as compared with standard 10-year repayment
- 14. Example Repayment Plans Repayment Plan Monthly Loan Payment Total Interest Total Payments Standard – 10 Years $288 $9,524 $34,524 Extended – 12 years $254 $11,639 $36,639 Extended – 15 years $222 $14,946 $39,946 Extended – 20 years $191 $20,802 $45,802 Extended – 25 years $174 $27,054 $52,054 Extended – 30 years $163 $33,674 $58,674 Assumes $25,000 unsubsidized Stafford loan at 6.8% interest and ignores balance-based setting of extended repayment term.
- 19. Debt Grows with Capitalized Interest Forbearance Duration Capitalized Interest Increase in Loan Balance Increase in Life-of-Loan Interest 3 months $171 1.7% $236 (6.2%) 6 months $345 3.4% $476 (12.5%) 1 year $702 7.0% $967 (25.4%) 3 years $2,256 22.6% $3,115 (81.8%) 6 years $5,021 50.2% $6,933 (182.0%) 9 years $8,409 84.1% $11,613 (304.8%) 12 years $12,562 125.6% $17,348 (455.4%) Increases in loan costs from capitalized interest on a $10,000 Stafford loan with a 6.8% interest rate and a 10-year loan term
Notas del editor
- Grace period before repayment begins is 6 months on Stafford loans and 9 months on Perkins loans. First payment is due within 60 days of consolidation (you lose the remainder of your grace period).
- Longer loan term may decrease the monthly payment but increase the interest paid over the life of the loan.
- Students typically have thin or nonexistent credit histories. If they graduate and get a good job, paying all their bills as per the agreement, they may be able to get a significantly improved credit score. But for the interest rate on a private consolidation loan to be better, they will need to have a credit score that is significantly better than the higher of the two credit scores on their original loans.
- Public service loan forgiveness is not retroactive There are a variety of other loan forgiveness programs available, especially for service in national need areas
- You can change repayment plans once a year
- Capitalized interest is a form of negative amortization, digging you into a deeper hole because interest continues to accrue Extended periods of nonpayment will cause your loan to grow much bigger
- Also total spending by vendor, to see if you’re spending too much money on specialty beverages. Get a second job on weekends; not only will you earn more money, but you’ll have less time to spend money. Use a spreadsheet program or Quicken or Microsoft Money or Mint.com (Mint.com is free) to track spending. Avoid credit cards, as spending $500 feels the same as spending $5, making it harder to exercise restraint
- You can be sued for the full amount and may be harassed by collection agencies You will be banned from enlisting in the Armed Forces
- May consolidate the defaulted loans after making 3 consecutive full and voluntary on-time payments or immediately if you agree to repay the loans using income-based repayment. Voluntary payments do not include wage garnishment or federal offset of income tax refunds On-time is defined as within 15 days of the due date for regaining student aid eligibility and consolidating a defaulted loan and within 20 days of the due date for rehabilitating the loan
- Discharge is more likely on private loans than on federal loans, since there are fewer options for repayment relief (e.g., disability discharge) Congress is currently considering legislation to allow private student loans to be discharged in bankruptcy. Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Al Franken (D-MN) introduced the Fairness for Struggling Students Act (S.3219) in the US Senate on April 15, 2010. Congressmen Steve Cohen (D-TN) and Danny Davis (D-IL) introduced the Private Student Loan Bankruptcy Fairness Act of 2010 (H.R. 5043) in the US House of Representatives on the same day. Note that if you file for bankruptcy on debts other than student loans, some private student loans include a "universal default" clause which will make the loans due in full immediately
- Sources of money for settlements: loan or gift from relatives, home equity loan, big bonus at work, inheritance, winning the lottery
- Private student loan ombudsman coming soon.