Student Federal Loan Debt Management
Bodies involved with Student Loans:
US Federal Government (authorises funds for the loan programme)
The school (certifies student eligibility and enrolment status)
Lender (banks, credit unions, etc, who can fund education loans)
Borrower (person signing the promissory note to repay the loan)
Servicer (processes loans, payments and deferments)
Guarantor (guarantees/insures the loan)
Secondary Market (purchases loans from lenders)
Your Rights and Responsibilities
Written information on loan obligations, including consolidation
An explanation of loan default and its consequences
A copy of your promissory note and a return of the original note when the loan is paid in full
Loan balance information and a repayment schedule prior to repayment
Notification if your loan is sold, with information on the new holder
A federal subsidy, if eligible
A grace period, if applicable
Prepayment of your loan early without penalty
A deferment, if eligible
Forbearance, if eligible
Repay the loan according to the repayment schedule you have agreed
Notify your loan servicer of anything that affects your repayment ability, or which may affect your eligibility for deferment or cancellation
Notify your loan servicer of any changes in your status, including graduation, and any changes to your name, address, or phone number
Notify your loan servicer if you fail to enrol for the period covered by your loan
Notify the School of any change in your address
Read these guidelines before you graduate
Student Loans MUST be repaid even if:
you do not complete your academic programme
you are not able to find a job
you don’t like your school or its services.
Know Your Loan Portfolio
All student loans are either subsidized or unsubsidized:
subsidized loans: have no interest cost while you are in school, in grace, or during an authorised deferment period. (Subsidized Stafford Loan)
unsubsidized loans: accrue interest from the moment of disbursement. (Unsubsidized Stafford Loan, Private Loans such as Signature)
Interest rates are either fixed (unchanging) for the life of the loan or variable (fluctuating) over the life of a loan, based on a formula.
Stafford Loans, for example, currently have adjusted interest rates each year although the rates are capped, never exceeding 8.25%.
Capitalization is the addition of interest to the principal balance of your loan and increases both the monthly payment amount and total payoff amount. Your promissory note will detail the capitalization on your loan.
Find out from your lender if they offer any borrower benefits. Research the terms to know and understand your options.
You can make pre-payments, that is make additional early payments, on your loans without penalties. This will reduce the total cost of your loan. When making pre-payments be aware of the relative costs and make payments towards your unsubsidized loans with the most frequent capitalization first as they are the most expensive loans. Loan payments are generally applied first towards the interest, then the principal.
Know Your Grace, Deferment and Forbearance Options
Student loan repayment begins after you graduate or leave school. Under certain circumstances, you may delay repayment. In these cases, you use your grace, deferment and forbearance options, and you will generally use them in that order.
The period of time after you graduate (or withdraw or go below half-time) during which you need not make payments. No application is required. The amount of time varies – for the Stafford loan there is a 6 month grace period. Interest stays subsidized on subsidized loans but starts accruing on unsubsidized loans.
Period when a borrower who meets certain criteria may suspend loan payments. Application is required annually. Interest stays subsidized on subsidized loans but starts accruing on unsubsidized loans.
Borrowers who borrowed their first Stafford, GSL or SLS loan after July 1, 1993 are eligible for 5 types of deferments on Stafford loans:
In-School – attending an eligible institution at least half-time
Unemployment – seeking but unable to find full-time employment
Rehabilitation Training – participating in a full-time rehabilitation training programme.
Graduate Fellowship – enrolled in a full-time graduate fellowship programme
Economic Hardship – experiencing an economic hardship based on a government formula. For economic hardship eligibility two conditions must be met:
1.the borrower’s total monthly loan payments on Federal education loans amortized over 10 years must equal or exceed 20% of their monthly gross income
2.the borrower’s monthly gross income minus total monthly loan payments as described above must be less than $2,420 (2005-2006, subject to change each year).
Eligible loans for economic hardship include: Stafford, GSL, SLS. Not included are private education loans, credit card debt, mortgages or car payments. Monthly gross income refers to the borrower only. Poverty level, interest rates and income can change each year, so deferments must be applied for each year. If you qualify for each year, you may defer for up to three years. Your loan servicer can calculate the numbers for you, but be sure that they are aware of all your federal education loans.
A temporary adjustment (no payments, lower payments) to the repayment schedule in cases of financial hardship which is granted at the servicer’s discretion. Application is required at least annually. In general you would apply for forbearance after your grace and deferment eligibilities are exhausted. In forbearance interest accrues and capitalizes on all loans subsidized and unsubsidized so it is expensive and should only be used to avoid delinquency and default.
Know the Cost before Choosing Your Repayment Plan
Divide your annual salary by 12 to get your monthly gross income and work out a budget to determine how much you can afford to pay on your student loans and how long it will take you to repay them.
Standard and Graduated Repayment
Standard Set monthly payments over 10 years. Higher monthly payments but lowest overall cost.
Graduated Payments start low, increase over time. Finish in 10 years. Lower monthly payments at the start but higher overall cost.
Income-Based and Extended Repayment
Income-Based Payments are tied to income. Finish in 10 years. Lower monthly payments at first but higher overall cost.
Extended Under certain conditions (consolidation or first Stafford after 10/7/98) terms can be extended up to 30 years. Lowest monthly payments but highest overall cost. You can start on this plan and then switch to a less costly plan later.
Pay off or ‘refinance’ many loans with one new loan which has new loan terms and conditions. This offers convenience, an improved monthly cash flow from extended lower payments, additional deferments and new hardship possibilities. Each case is different and the decision to consolidate depends on each borrower’s educational debt, income and economic goals.
Only federal loans can be consolidated.
The interest rate is a weighted average rounded up one eighth of a percent and fixed.
Your servicer will provide the total cost of consolidation.
You should continue to pay your current loans until consolidation is completed.
In general it is best to consolidate after grace and deferment options are used.
Keep Good Records and Communicate with your Servicer
Managing your student loan account and all documents carefully now will pay off in the end and help you to avoid running into problems in the future.
Maintain copies of your student loan records and keep everything current with your lender/servicer. It is your responsibility to let your servicer know any address and name changes so that they can find you.
Ensure that your loans are deferred while you are in school and communicate with your lender/servicer if you are experiencing any difficulty with repayment before your account becomes delinquent.
Your lender may sell your loan to a new holder (secondary market):
you should receive written notification from your new servicer
your loan terms and conditions should not change.
Private Loans – the repayment terms of private loans can differ greatly by lender. You should check the details with each lender and whether they offer a grace period or deferment and forbearance options.
Understand the Consequences of Delinquency and Default
Delinquency – is the failure to make payments when due and is reported to credit bureaus affecting your credit history.
Default – a payment unpaid after 270 days is assumed to be a default. Your servicer can garnish your wages and tax returns. The servicer can sue and you are responsible for costs. Collection agencies take over and add an additional 15-18% to the loan. Licences may be pulled. Student loans cannot be discharged in bankruptcy. Loans can only be cancelled if you die or become too disabled to work.
If you are experiencing any difficulties in repayment you should contact your servicer immediately to make appropriate arrangements and avoid the consequences of default.
National Student Loan Data System www.nslds.ed.gov
Provides data on your federal student loans; all your loans should be listed in this central database.
Federal Student Aid Ombudsman www.ombudsman.ed.gov 1-877-557-2575
Designed to be a neutral independent viewpoint to assist in resolving student loan disputes. Good records are essential when you contact the Ombudsman.
Deductions up to $2,500 per year may be available on interest paid on education loans. Detailed information on tax deductions and tax credits can be found at www.salliemae.come/manage/taxrelief.html
You are entitled to one free credit report each year. You should review your credit report to ensure that your information is correct because it is used to determine your interest rates and fees when you apply for a private loan, a credit card, a mortgage, etc.
The following websites contain information on credit and allow you to order a copy of your credit report:
Trans Union Credit Bureau www.tuc.com
Equifax Credit Bureau www.equifax.com
Information and Advice on your Loans
Your lender/servicer can give you information and advice on your loan.
The Student Help Foundation www.stuhelp.org (a non-profit foundation and a partner of the Student Assistance Foundation) offers free financial and loan management advice to students and recent graduates whether or not they student have loans with SHF.
Telephone: (USA) 866 655 HELP or (UK) 0800 066 4357. The UK office is based in London and will take calls from 9.00am to 12.00 midnight.
This information is based on loan management information published by Sallie Mae.