After addressing graduation invitations, sending out résumés and picking a class ring, many students will have one item left on their graduation checklists — repaying their student loans.
Starting life after college $15,000 in debt is especially daunting for graduating University of Memphis business major, Alicia Johnson.
“Repaying the money has always been in the back of my mind, but now I’m beginning to feel a little overwhelmed,” Johnson said. “I haven’t gotten any solid job offers. Graduating with no job is tough. Graduating with no job and student loans to repay is depressing. I’d rather not think about it.”
Sticking your head in the sand and ignoring the reality that student loan repayments must begin six to nine months after graduation is a bad idea, said David Esquith, financial aid administrator at the U.S. Department of Education (USDE).
While discharging a student loan is next to impossible, postponing loan repayment is an option available to most borrowers.
“A deferment allows the borrower to temporarily postpone payments on a loan,” Esquith said. “Borrowers have a right to receive deferment for certain defined periods of time. Loans can generally be deferred for specific situations such as returning to school, unemployment or economic hardships.”
If students have a subsidized loan, like a Perkins loan, they will not be charged interest during the deferment, Esquith said.
According to the USDE, borrowers who are temporarily unable to meet their repayment schedule but are not eligible for deferment may receive forbearance for a limited and specified time. During forbearance, payments may be postponed or reduced.
“It’s important to keep in mind that deferments and forbearances are not automatic,” Esquith said. “Each loan program requires the borrower to provide documentation to support the request for deferment or forbearance.”
It is essential that borrowers remember, Esquith said, they must continue making scheduled payments until they have received notification that the lender has granted the deferment or forbearance. As with any loan, failing to make payments will have a negative effect on the borrower’s credit rating.
In addition to deferment and forbearance, there are other forms of payment relief. Graduated and income-sensitive payment plans are available. Graduated payment plans provide short-term relief through low interest-only payments followed by a gradual increase in payment, usually every two years.
“An income-sensitive payment plan offers borrowers payments based on yearly income,” Esquith said. “As that rises and falls, so do the payments.”
These options will provide borrowers with payment relief and help maintain a good credit rating. During periods of deferment and forbearance, for those with subsidized FFEL or Direct Loans, the government will make interest payments on the borrower’s behalf.
However, if a student does not qualify for federal interest subsidies on their deferment or if a loan is in forbearance, the loan balance will increase by the amount of the unpaid accumulated interest unless the borrower elects to pay the interest as it accumulates.
Different types of deferments are available for Perkins, Stafford and PLUS loans.
It is important to act quickly when loan payments become hard to handle, according to the USDE. Defaulting or failing to make payments as scheduled has serious financial consequences.
“In every case of loan default I’ve seen, the government has successfully taken steps to garnish the borrowers wages until such time as the loan is repaid,” Esquith said. “Wage garnishment has a tremendously negative effect on credit ratings and the repercussions can be devastating later in life.”
Historically, borrowers who have defaulted on education loans have had difficultly or have been unable to purchase houses or cars or to receive credit cards.
Financial institutions don’t trust people with dodgy repayment histories,” Esquith said.
To avoid becoming a person with dodgy credit, borrowers should start the repayment process with loan exit counseling, said Cassandra L. Weems, Federal Student Aid administrator for the USDE Office of Education Organizational Structure.
“Exit counseling is full of helpful tips and explanations that will help guide the borrower through the repayment process,” she said. “It is also a good place to address consolidation questions.”
A Federal Consolidation Loan is a student debt management tool, according to Weems, that enables the borrower to bundle all of the federal loans they receive to finance your college education into a single loan.
“The rules governing consolidating federal loans are fairly complicated,” Weems said. “Borrowers will need assistance understanding the process and which consolidation programs will best meet their financial needs. There are a lot of consolidation programs out there. Not all are created equally.”
The USDE has compiled a list of tips for those considering a Federal Consolidation Loan. The list is on the USDE Web site, www.studentaid.ed.gov.
Most borrowers with Stafford, PLUS, Perkins and other federal education loans are eligible for consolidation loans, according to the USDE. Federal consolidation loans allow borrowers to combine their federal education loans into a single loan with one monthly payment, which can be significantly lower than the payment required under the standard 10-year repayment option.
“Consolidation loans are provided by banks, secondary markets, credit unions and other lenders under the Federal Family Education Loan Program (FFEL),” Weems said.
The federal government under the Direct Loan Program also provides a few consolidation loan programs.
U of M graduating seniors can contact their financial aid counselor to schedule an exit interview by visiting the Student Financial Aid Office at Scates Hall or calling 678-4825. They can also complete exit interviews online at www.enrollment.memphis.edu/FinancialAid.
