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Student Loans Part I

Student loan balances continue to increase every year – here are some of the recent statistics[i]:

  • 67% of students take out federal student loans
  • The average federal loan balance is now $23,186 – if you include PLUS loans the balance goes to $27,803
  • Master’s degree students accrue an additional $25,000, Ph.D. students $52,000 and Professional students an additional $79,836.
  • There is approximately $945 billion in outstanding federal student loans, which exceeds credit card debt[ii]
  • It is estimated that there is $158 billion in private student loans

For this week’s and next week’s Financial Tips I will share some basics on student loans, including what types of loans there are, repayment issues, then finally the recently released default rates.

TYPES OF STUDENT LOANS

Federal student loans are also called Direct Loans because they are loans directly from the federal government to the borrowers through the school or university. Your Direct loan is either a Stafford loan or PLUS loan.

Stafford Loans are either subsidized or unsubsidized. Subsidized loans are given out based on financial need and the interest is deferred until after repayment begins (i.e. interest is not charged while you are a student). Unsubsidized loans are not based on financial need, but interest accrues from the day you take out the loans. Interest (and principal) payments can be made while going to school.

PLUS loans are loans for parents of undergraduates and for graduate and professional students. All PLUS loans are unsubsidized. As with Stafford loans, interest and principal payments can be made while going to school.

In general, repayment begins 6 months after you leave school – either dropping out of school or graduating. The interest that has accrued on unsubsidized loans will be capitalized when repayment begins (meaning the accrued interest becomes part of the principal balance).

You can view your Direct loans online by going to http://www.nslds.ed.gov. This system shows you your loan balances, the type of loans you have and who the servicer is.

STEPS TO TAKE BEFORE GOING INTO DEFAULT

Student loans generally go into default after nine months of no payment. If you are facing problems paying your student loans there are some steps you should take before you go into default:

  • Communication with your lender is always an important key – whether you are dealing with student loans, car payments, credit card payments, rent or a mortgage. If you communicate with the lender before payments are late, your lender is generally much more willing to work with you to find an acceptable solution.
  • Deferment – if you are unemployed or having some other type of economic hardship you should apply for loan deferment. During deferment you do not have to make payments on your loans. In addition, no interest is charged on subsidized loans.
  • Forbearance – Forbearance is similar to deferment (no payment is due during forbearance), but interest does accrue on subsidized loans. In many cases you can get a forbearance even if you are already in default.
  • Repayment Plan – If you don’t qualify for a deferment or forbearance you can often find a more favorable repayment plan. The standard plan is level payments for ten years. If that payment is too high there are repayment plans that will give you a lower payment:
    • Extended Repayment – you pay back the loan over 25 years instead of 10. You need an aggregate balance of $30,000 or more to qualify.
    • Graduated Repayment – you still pay the loan back over 10 years, but the payments start our low then increase every 2 years.
    • Income-based Repayment – most borrowers will pay no more than 10% of their income under the IBR plan. Most will pay even less (or have no payment at all). Payments are based on your income and family size. For more information on IBR visit http://www.ibrinfo.org/index.php.

As an important side note, in general, student loans cannot be discharged through bankruptcy.

Next week we will continue our discussion of student loans – looking at the current default rates and steps students can take to keep their student loan balances, and therefore their payments, low.