Paying For College For Dummies
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Student loans to help you pay for college may seem simple. Unfortunately, appearances can be deceiving. Numerous types of federal student loans and repayment plan options and lots of private loans exist. Repayment options and forgiveness of some loan balances are not widely or well understood.

How to keep track of your loans

During the years of college, you’ll get bombarded with various financial aid forms and financial aid award letters and notices. If you take out student loans, you should also begin to receive various notices about those.

Students, of course, are likely to be changing addresses, especially post-graduation. Parents and families may move as well when residency for local schooling options is no longer required or retirement beckons. So, be sure that you keep all of your student lenders (and servicers) informed and updated regarding your correct mailing addresses.

Especially if you’ve taken loans from numerous sources (for example, federal government–sponsored and private), total up the amount of debt accumulated. Debt surprises are rarely good! And be sure you are tracking all of your student loans as they may well be represented by multiple lenders and/or servicers by the time that college degree is earned.

What cosigners means for responsibility

If parents have cosigned student loans with their son or daughter, everyone who has cosigned is legally responsible for the repayment of those loans. Of course, different families will have different expectations as to who actually will make the repayments. In many families, it’s a joint effort and project whereas in other families, the parents elect to carry the full burden. And, in some families, the son or daughter is expected to make all payments.

At a minimum, families should have candid discussions about expectations and plans for repaying the student loans they’ve taken out. And, putting an agreement in writing is a fine idea to ensure that everyone is clear on the plan and so that there’s some accountability. That’s not to say that a written plan can never change; with discussion and agreement, your plan can be modified.

Know the loan terms

Whenever you take out a federal government student loan, you will sign a federal student loan promissory note that spells out all the terms and conditions of the loan.

During the years of college, you should have received in the mail periodic updates on the outstanding student loans to which you have committed. For federal student loans, there are nonprofit processing companies (see the following list) that will keep you updated on your loans.

Here's a list of the loan processors that the U.S. Department of Education uses:

Loan Processors
Loan Servicer Contact
CornerStone 1-800-663-1662
FedLoan Servicing (PHEAA) 1-800-699-2908
Granite State – GSMR 1-888-556-0022
Great Lakes Educational Loan Services, Inc. 1-800-236-4300
HESC/Edfinancial 1-855-337-6884
MOHELA 1-888-866-4352
Navient 1-800-722-1300
Nelnet 1-888-486-4722
Aidvantage 1-866-264-9762
ECSI 1-866-313-3797

Generally, six months after graduation, federal student loan payments begin. You will definitely be hearing from the loan processor(s) for your loans around and continuously after that time.

Private loans work differently and have different terms and conditions, which hopefully you took the time to understand before you took those out.

How to use the auto-pay feature to save money

When your student loan repayments begin, I recommend that you set them up for automatic payment. This feature drafts the money from your bank account monthly on or before the payment due date.

In addition to ensuring that you don’t have late payments or missed payments, most loan servicers or lenders will knock 0.25 percent or so off of the effective interest rate you’re paying for using auto payment. Some private lenders may reduce the rate a tad more than that.

One potential downside to putting your student loan repayments on auto-payment would be if it ever leads to your bank checking account being overdrawn. So, be sure you’re keeping a close eye on your account balance so that nasty surprise doesn’t occur.

Loan forgiveness conditions

There are a number of conditions under which a portion or all of government student loans can be discharged or forgiven. Most commonly this occurs because the student-borrower is working in a field of public service. However, this may also occur when the student-borrower suffers adverse health conditions.

Borrowers who are working in education, government, military, certain nonprofit organizations (not labor unions or partisan political organizations), law enforcement, or public health may be eligible for the Public Service Loan Forgiveness program.

To be eligible, borrowers must have completed 120 monthly (that’s 10 years’ worth) on-time payments. Borrowers must also be working full-time in public service and be paying their loans back under an income-driven repayment plan.

Unfortunately, the other conditions under which student loan balances can be discharged are less pleasant to consider. This can happen if the student-borrower suffers a long-term disability or passes away.

Your federal loan repayment options

Believe it or not, there are currently eight different repayment plans/options for your federal student loans. I give you a brief overview here so that you’re aware of the range of what’s currently available and what may benefit and work for you.

A number of the repayment plans are sensitive to and based upon the student’s income relative to the amount of student loans he has outstanding. The repayment schedule, however, is not tailored to the local cost of living (strangely, there’s only an adjustment for students in Alaska and Hawaii). So, students turned workers who are living in high-cost urban areas like New York City, Chicago, Boston, Washington, San Francisco, and so on don’t get any special breaks. Your salary may be a bit higher working for employers in those high-cost areas, which actually undermines your chances and ability to qualify for income-based repayment plans.

Here, then, is a quick overview of the repayment plan options for so-called direct and federal family education student loans:

  • Standard repayment: Your payment amount is fixed and allows the loans to be repaid in up to ten years. This plan works well for students who have a modest debt outstanding relative to their incomes and for whom the monthly payment amount fits within their budgets from the beginning of their working years after college.
  • Graduated repayment: All borrowers may use this plan, which begins your payments at a reduced level compared with the standard repayment plan and then bumps them up every two years or so. This plan, which leads to somewhat higher total interest charges compared with the ten-year plan, still ensures the loans are paid off within ten years.
  • Extended repayment: Students who have more than $30,000 in eligible loans outstanding may repay them on a fixed payment or graduated repayment basis over a period of up to 25 years. Thus, total interest paid will be significantly higher than under the ten-year repayment plans.
  • Revised pay as you earn repayment (REPAYE): Under this plan, your monthly payments are annually set at 10 percent of your discretionary income, which is the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence. Payments are recalculated each year and based upon your updated income and family size (if you’re married, your spouse’s income and student loans are considered as well). Any undergraduate outstanding student loan balance will be forgiven if you haven't repaid your loan in full after 20 years.
  • Pay as you earn repayment (PAYE): For this plan, you must have a high debt relative to your income. Your monthly payment will never be more than the ten-year standard plan amount. The details of the annual payment reset are the same as under the REPAYE option.
  • Income-based repayment (IBR): This option is similar to PAYE except for the following differences. Your monthly payments will be either 10 or 15 percent of discretionary income, depending on when you received your first loans, but never more than you would have paid under the ten-year standard repayment plan. Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 years or 25 years, depending on when you received your first loans.
  • Income-contingent repayment (ICR): Your monthly payment will be the lesser of 20 percent of discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income. For this plan, discretionary income is the difference between your annual income and 100 percent of the poverty guideline for your family size and state of residence. Any outstanding balance will be forgiven if you haven’t repaid your loan in full after 25 years.
  • Income-sensitive repayment: Your monthly payment is based on your annual income, but your loan will be paid in full within 15 years.
One more important detail: You aren’t locked into a payment plan once you choose it. You can switch among the various repayment plan options as you are qualified to do so. It is possible but harder to negotiate a different repayment plan for private student loans.

There may be additional requirements to qualify for some of the repayment plans discussed here.

Cautiously consider refinance possibilities

The interest on each student loan, both federal and private, varies based upon when it is originated. Therefore, it is possible that by the time a student graduates and begins repayment, interest rates on newer, comparable loans may be lower.

When that situation occurs, it may be possible to refinance some of your student loans with a private lender (see my short list later in this section) at a lower interest rate than you are currently paying on those loans.

When contemplating a refinance, always compare the interest rate being offered on a new loan to the rate you are paying on your existing student loans. If the rate is lower on a new loan that would provide you with funds to pay off some of your existing student loans, then you should consider refinancing.

You also need to weigh and factor in any additional fees and charges — loan application fees, credit report fee, and so on — for a new loan you’re considering.

There’s a simple way any lender can make a refinance appear attractive that you should never fall for. They will show you how a refinance can lower your monthly payments — but that can always be done by offering you longer-term loans. Your total payments and total interest paid will be higher if you fall for this trick.

Beware the hucksters out there pitching you to refinance your student loans or rub out problems like your late payments if you fork over a hefty up-front fee to them. As I explain in the next section, if you’re behind in your payments, there are no-cost steps that you can take to address that with lenders and possibly get some relief.

You need excellent credit to be able to refinance student loans and do so at an attractive interest rate. One way to boost the creditworthiness of a young borrower with a limited credit history is to have parents cosign the loans. This, of course, puts the parents in a place of responsibility for the loans. If you’d like to look around, start with some of the proven players in this space, like CommonBond, Credible, Earnest, and SoFi.

How to ask for relief

Hard times can happen, often without warning. Employers sometimes have to lay off workers. Or perhaps you have some significant unexpected expenses and you’re having a hard time making your required monthly loan payments. There is some good news herein: You may qualify for some relief from making your federal student loan payments until you can afford to do so again.

There are two ways in which you may qualify for what is called “forbearance” of your federal student loans. There are two types of forbearance: general and mandatory.

With general forbearance, your federal student loan servicer decides whether to grant a request for forbearance. For this reason, a general forbearance is sometimes called a discretionary forbearance. You can request a general forbearance if you are temporarily unable to make your scheduled monthly loan payments for the following reasons:

  • Financial difficulties
  • Medical expenses
  • Change in employment
  • Other reasons acceptable to your loan servicer
General forbearances are available for Direct Loans, Federal Family Education (FFEL) Program loans, and Perkins Loans. For loans made under all three programs, a general forbearance may be granted for no more than 12 months at a time.

If you’re still experiencing a hardship when your current forbearance expires, you may request another general forbearance. However, there is a cumulative limit on general forbearances of three years.

If you meet the eligibility requirements for a mandatory forbearance, your loan servicer is required to grant the forbearance. (Note: The mandatory forbearances discussed in the following list apply only to Direct Loans and FFEL Program loans unless otherwise noted.) You may be eligible for a mandatory forbearance in the following circumstances:

  • AmeriCorps: You are serving in an AmeriCorps position for which you received a national service award.
  • Department of Defense Student Loan Repayment Program: You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
  • Medical or dental internship or residency: You are serving in a medical or dental internship or residency program, and you meet specific requirements.
  • National Guard duty: You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.
  • Student loan debt burden: The total amount you owe each month for all the federal student loans you received is 20 percent or more of your total monthly gross income, for up to three years. (Note: This mandatory forbearance type applies to Direct Loans, FFEL Program loans, and Perkins Loans.)
  • Teacher loan forgiveness: You are performing teaching service that would qualify you for teacher loan forgiveness.
Mandatory forbearances may be granted for no more than 12 months at a time. If you continue to meet the eligibility requirements for the forbearance when your current forbearance period expires, you may request another mandatory forbearance.

You must continue making payments on your student loan(s) until you have been notified that your request for forbearance has been granted. If you stop paying and your forbearance is not approved, your loan(s) will become delinquent and you may go into default.

How to make use of the student loan interest deduction

You may take up to a $2,500 federal income tax deduction for each tax (calendar) year for student loan interest that you pay on IRS Form 1040 for college costs as long as your modified adjusted gross income (AGI) is less than or equal to $70,000 for single taxpayers and $140,000 for married couples filing jointly. This tax deduction is phased out if your AGI is between $70,000 and $85,000 for single taxpayers and between $140,000 and $170,000 for married couples filing jointly. (These AGI amounts are for tax year 2020.)

This deduction is not an itemized deduction, so anyone can take it on her Form 1040 as an “adjustment to income.” Each of your lenders should be able to provide you with a yearly summary that shows how much you paid in interest for the tax year. If you paid $600 or more in interest to a single lender, that lender is required to provide you with Form 1098-E, which documents the interest you paid for the year. Otherwise, ask your lender or loan servicer what you paid in interest for the year in question.

Pause your loans with a return to higher education

Getting a college degree may not be the end of a person’s higher education. Returning to school at least half-time enables those who have subsidized federal government student loans to hit the pause button on those loans. Remember that with subsidized federal student loans, interest does not accumulate, and no loan payments are due while the student is in school (again, at least half-time).

Private student loans and nonsubsidized federal student loans are, of course, a different matter. The interest keeps accumulating on those even if a former college graduate returns to school at least half-time. And, with some private student loans, you won’t be able to defer making payments and will need to make payments regardless of your student status.

About This Article

This article is from the book:

About the book author:

Eric Tyson is a five-time bestselling author, real estate investor, and syndicated columnist who gives people the tools to better manage their personal finances and investments. Robert S. Griswold, author, teacher, and a successful real estate investor, is an active, hands-on property manager with a large portfolio of residential and commercial rental properties.

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