Guidance for Student Loans

Both the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (Direct Loans or FDSLP) consist of what are generally known as Stafford Loans for students. The main difference between the two is one is a subsidized loan while the other is an unsubsidized loan. This article will provide you with more information on both loan types and the different repayment options.

The FFELP program and FDSLP program offer many of the same repayment options, but they each also offer an individual repayment option specified by the loan program that was used. The mutual repayment options include standard (set payment, at least $50 for up to 10 years), graduated (increasing payments throughout the 10 years), extended (smaller payments for up to 25 years, but must have at least $30,000 in loans and loans must have originated after October 7, 1998), and (a new option as of July 2009) the income based repayment plan (monthly amount capped at an affordable rate based on income and family size, and any balance left after 25 years is forgiven if set criteria is met, although the amount forgiven can be taxed as income). The income based repayment plan is looked at as a partial financial hardship. The exclusive repayment option for the FFELP loan is the income sensitive option, which is based on income and loan debt with a minimum amount large enough to cover interest, and payments are adjusted annually with a repayment period of 10 years. This option needs to be applied for yearly, but should not be used for long periods of time as it still has a 10 year repayment timeline. The exclusive repayment option for the Direct Loans is called the income contingent option. This payment is calculated each year based on adjusted gross income (AGI), plus your spouse’s income (if you are married), family size, and the total amount of your Direct Loans. If payments are not large enough to cover interest, unpaid interest is capitalized (added to the loan balance) once each year with a cap on total capitalization of 10% of the original loan amount when starting this repayment option. However, interest will continue to accumulate. Overall, these payment options offer a wide variety to clients who are concerned about making student loan payments. A loan repayment option can be changed annually. If it needs to be changed more often, individuals are encouraged to talk with their lender.

Individuals want to avoid delinquency with student loans because there are many repercussions involved. If you are struggling with loan repayment, the first step that is encouraged is to look into the various repayment options listed above. However, there are other options as well. These options include deferment, forbearance, and consolidation. A deferment allows you to temporarily stop making payments on your loan for reasons such as economic hardship (limit of 3 years) or unemployment (limit of 2-3 years). A forbearance (usually if you don’t meet the eligibility requirements for a deferment but are temporarily unable to make payments due to circumstances such as financial hardship, medical bills, or budget deficit) temporarily allows you to stop making payments, make smaller payments, or extend the time for making payments. The final option is consolidation. Consolidation is combining your loans together to get one monthly payment. This option can offer a lower interest rate and possibly even a lower monthly payment.

Along with these payment options and ways to avoid delinquency, an individual has a few more things to consider. First, if the borrower chooses to have their monthly payment come out of a checking or savings account automatically, this can lower the interest rate by .25%. Sometimes lenders will also offer a reduction in interest if a set number of payments are received on time. There are also loan forgiveness programs in which borrower’s loans are paid off in exchange for things like volunteer work, public service, or military service. Other loan forgiveness programs and reductions are out there, but individuals need to ask their loan provider, as they may be specific to the type of loan that was given.

Whatever the situation, the above mentioned options are the best ways to handle paying back student loans. If loans do not get repaid, they can and will go into default. Default occurs when accounts are 270 days delinquent. At that time, individuals must pay the loan in full, consolidate the loan (which requires income contingent repayment for Direct Loans, and qualifying payments may be required for FFELP loans), or do a loan rehabilitation (which requires that the individual makes 9 on time payments within a 10 month period). The loan rehabilitation option is only available once. After the loan is rehabilitated, it will go back to the original loan department and be serviced there until it is paid in full. Continued failure to repay a loan in default may lead to several negative consequences for you. Once your loan is assigned to a guaranty agency or the U.S. Department of Education for collection, there are a number of consequences that could occur. First, the IRS may offset your federal and/or state tax refunds and any other payments, as authorized by law, to repay your loan. Second, you may be subject to wage garnishment (up to 15% of your disposable pay). Third, you may have to pay additional collection costs after your loan is assigned to a private collection agency for collection. Fourth, the department may take legal action to force you to repay the loan which could cost you additional fees (court costs, attorney fees, etc.) as well. Fifth, credit bureaus may be notified and your credit rating will suffer, which could cause you to lose your eligibility for other federal loans such as FHA or VA, not to mention the loss of eligibility for additional Title IV federal financial aid. Finally, you may be denied or lose a professional license.

Overall, there is a lot of information to know and understand in regard to student loans, so if you are having trouble making your student loan payments, contact your lender immediately to get something set up. Lenders are always willing to work with you and there are plenty of options to choose from. Communication is highly recommended and usually necessary when it comes to repaying student loans because, as you can see, letting your student loans go without payment only makes things worse.

-Lisa Pribula and Jeral Croaker