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There it is in the pile of mail. It’s the envelope from the company that services your federal student loans. Inside, a statement of what you owe. It has been six months since graduation which means your initial grace period is over. You signed the Master Promissory Note agreeing to pay back what you borrowed. Now is the moment of truth (cue the dramatic music here). When you open the envelope you may feel like Sisyphus carrying the boulder up the hill. But, remember you are not the only person facing student loan repayment. According to the Federal Reserve in 2017, 42% of students attending college and 30% of Americans overall had to take out debt to cover their higher education expenses.
An inescapable fact
If you have federal student loans, you likely already know repayment is inescapable. In fact, getting your loans discharged in bankruptcy is only allowed in very limited circumstances.
The traditional loan repayment schedule is 120 equal monthly payments.
However, there are alternatives to the traditional schedule that you can take advantage of. Be aware, doing so will require time, work, and, above all, diligence. In her New York Times article, “The Should Be Solution To The Student Debt Problem,” Tara Siegel Bernard outlines some of the stresses of enrolling in, and using, various income-based repayment programs offered by the Federal Government. Most notably, she found enrolling in one of the Government’s repayment programs, a hurdle on its own, didn’t unilaterally guarantee successful loan repayment.
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So how do you start managing student loan debt without it taking over your life? First, do your initial homework and know exactly what you need to do to repay your student loans. You can never have too much information regarding student loan repayment…assuming you have the right information. Remember, for better or worse, that the federal government expects its money back on schedule. In other words, it may not accept receiving bad information (regardless of the source) as a defense for late payment or non-payment. Ok, you get it already. So where do you find out where you stand? Do you just need the information in the statement you received?
Getting started managing student loan debt
The official record of all your federal student loans can be found in the National Student Loan Data System, the database maintained by the US Department of Education. To track your student loans and your repayments within the database, you will need to create a Federal Student Aid ID.
This database is where you will find information about the amount you owe on each student loan and the interest rate you are being charged for each loan.
When you look at the database, remember your loan servicer is not the same as the owner of your loan. This may come as a surprise if the only correspondence you have ever received is from your loan servicer. The Department of Education contracts loan servicers to collect, track, and document your loan payments. The servicers are also responsible for collecting and processing applications for the alternative student loan repayment programs that the Government offers.
The National Student Loan Data System is an important tool because it lets you double-check the information from your loan servicer against the information provided by the Department of Education. Using it can save you potential headache and heartache by letting you ensure the information you act upon is accurate. The six-month grace period after graduation is the ideal time to do this research. Don’t wait until your loan servicer is breathing down your neck to get started!
What can I afford to pay?
Once you have an accurate picture of all your federal student loans, the next step is to understand how much of a loan payment can you afford. The standard loan repayment schedule for federal loans is 120 equal monthly payments. This schedule includes a fixed interest rate to repay the original balance of the loan in full. This applies to each loan if you have more than one. If, after you do the calculations, you decide you are okay with this schedule, there is nothing more you need to do besides making your payments consistently and on time.
Additionally, you can make extra payments if you wish to pay the loan faster, without fear of changing the terms of the standard repayment schedule. On the other hand, if you know you can’t afford the monthly payment under the repayment schedule, you should consider one of the other federal repayment plans.
Federal student loan repayment options
The Government has eight different repayment plans for student loans, not including the Public Student Loan Forgiveness plan which has special requirements. Yes, you read that right – eight different plans! If that’s not confusing enough, not all student loans qualify for every repayment plan. So, you need to read the details of each repayment plan carefully.
Out of the eight plans, the Standard, Graduated, and Extended repayment plans are not income-based. Instead, they have fixed repayment terms ranging from 10 years (Standard and Graduated) to 25 years (Extended). For example, the Graduated repayment plan begins with small monthly repayments. Then, it increases every two years in increments designed to stay on track for the 10-year repayment term. But remember, none of these repayment programs qualify for the Public Service Loan Forgiveness Program.
The other five repayment plans (Revised Pay As You Earn, Pay As You Earn, Income-Based, Income-Contingent, and Income Sensitive) the Government has are income-based. These plans have repayment schedules ranging from 15 years (Income Sensitive), 20 years (Revised Pay As You Earn, Pay As You Earn, and Income-Based) to 25 years (Income-Contingent). After the term is completed, if there is a balance remaining, it is forgiven by the Federal Government. This amount forgiven is considered income and is subject to regular income tax. All of these plans, except the Income Sensitive Repayment Plan, qualify for the Public Student Loan Forgiveness program.
IMPORTANT: All the income-based repayment plans require you to submit proof of your annual income each year through your loan servicer in order to remain in the plans. If you don’t submit this proof by the required date, you risk being disenrolled and having your loans revert to the standard prepayment plan.
Ultimately, it is your responsibility to remember all the terms and rules of your loan and to meet all the deadlines. You can’t count on your loan servicer to remind you that you need to be managing your student loan debt.
Managing student loan debt
If you thought that once you enrolled in a repayment plan you could just make payments and forget about your loans, you will find out the hard way (through increased payment amounts and extra fees) that you are mistaken. To avoid any problems managing your federal student loans, you should always:
- Stay on top of all electronic and paper correspondence you receive about your loan(s).
- Periodically check the status of your loan(s) and loan payments through your loan servicer’s online portal.
- Periodically check the status of your loan and loan payments. Do this through the National Student Loan Data System to compare against the information from the loan servicer.
- Check your credit report annually. Ensure the information on your student loan(s) is being reported accurately to the three credit bureaus.
Look into your payment options
Decide if you can afford the expected monthly payment(s) for your loan. List your monthly income and expenses on paper or in an online program or app to see how the expected payment would affect you financially.
If the current expected monthly payment is not affordable, review the alternative repayment plans available and then apply to enroll in a plan through your loan servicer as soon as possible. Make sure you actively monitor your application through the whole process to ensure all paperwork is received and all plan requirements are met.
About the Author
Dawn Torres-Gale, AFC
Accredited Financial Counselor
In 2008, Ms. Torres-Gale was chosen by the Financial Industry Regulatory Authority (FINRA) Foundation to be part of a select group of military spouses. Through this, she received FINRA sponsored training from the Association of Financial Counseling, Planning and Education and became an Accredited Financial Counselor® in February 2012.
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