Terms to know when you repay student loans
Paying off student loans can be a challenge, and loan statements full of unfamiliar vocabulary can make the process seem intimidating. Understanding the terminology can help you get a better handle on your options.
A grace period is a set period of time (usually 6 months) after you leave school (or stop attending below half-time enrollment) before you have to begin repaying your loan. The length of the grace period differs depending on the type of loan, and some loans may have no grace period at all.
You probably know the name of the banks that issued your loans, but when it comes time to pay them off, you’ll likely be dealing with loan servicers. These companies administer loans during repayment. If you need to modify the terms of your loan—for example, if your life circumstances change—you can reach out to the loan servicer for information and advice. Keep in mind that the servicer may change during the term of your repayment, so you may end up dealing with multiple servicers. If you encounter problems with your loan servicer—for example, if they are unresponsive—you may file a complaint related to your federal student loans with the U.S. Department of Education or your private student loans with the Consumer Financial Protection Bureau.
If you’re having a hard time repaying your federal student loans, you may qualify for income-driven repayment. These plans link your monthly payment to your income: You’ll pay between 10–20 percent of your discretionary income. This can be a good option for those with a limited salary who want to make student loans a smaller piece of their budget. Extending your repayment period generally means you’ll pay more in interest over the long term.
An extended repayment plan enables you to stretch out the repayment period on Direct or FFEL federal student loans up to 25 years if the sum of your Direct loans or FFEL loans (not the two combined) exceeds $30,000. This can be a viable alternative for those with a lot of student loan debt who do not qualify for an income-driven repayment plan. Keep in mind that, like with income-driven repayment, the extended repayment period will likely lead to higher total interest.
Consolidation refers to the practice of merging multiple outstanding loans into one new loan. Although student loan consolidation typically doesn’t lead to a lower interest rate, it can simplify your finances by making you responsible for one regular payment instead of multiple. It can also lower your monthly payments by extending the repayment term up to 30 years. This may then open the door to a more gradual and manageable payment schedule. One consideration: Combining loans could cause you to lose interest rate discounts or other benefits associated with the original loans.
Deferment is a temporary suspension of your loan payments. While the repayment of principal is always suspended in deferment, interest may still accrue, so you may want to make interest payments even though they’re not required. Generally speaking, you must apply and qualify for deferment. Qualifications may include unemployment, active duty military service or full-time enrollment in a postsecondary school, among others. More information about deferment qualifications can be found on the Department of Education website.
If you are having a hard time making student loan payments and do not qualify for a deferment, you can apply for forbearance with your loan servicer. Forbearance can allow you to stop or reduce your monthly payments for up to a year. Keep in mind that interest will continue to accrue during that time. Under certain circumstances, the servicer is required to grant you forbearance—for example, if you are in a medical or dental internship and you meet specific requirements or you are performing teaching services and would qualify for teacher loan forgiveness. Under other circumstances (for example, financial hardship or illness), your lender will determine whether discretionary forbearance can be applied.
Delinquency and default
If you fail to make your student loan payments on time, your loan generally becomes delinquent. After 30 days past due, your loan servicers can report a delinquency to the major credit bureaus, which can affect your credit score. If you are excessively delinquent (generally 120 days past due on a private student loan or 270 days past due on a federal student loan), your loan may go into default. If your loan defaults, you will be asked to pay the entire unpaid balance, plus any accumulated fees, immediately. For federal student loans, the government can take a variety of measures to collect overdue loans, such as seizing tax refunds or garnishing your wages.
Your credit score is a rating that indicates your creditworthiness, which represents the likelihood that you will repay loans and other bills on time. In the eyes of a lender, a high credit score indicates that a borrower will be more likely to make loan payments fully and on time. Because your student loan payment history is usually reported to the major credit bureaus, paying your loans on time can potentially help you build a better credit score.
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