Most people are dealing with two types of loans
While we tend to generalize the money we borrow to pay for school as “student loans,” there are actually many types. For the most part, though, they can be divided into federal and private loans. Federal loans are provided by the government, tend to have low interest rates, and have a lot of options for the borrower once it’s time for repayment. Eligibility for federal loans is pretty easy to meet and they don’t require a credit check. The downside is that there’s a limit on how much money you can borrow from the government for undergrad and grad school, and that’s where private loans come in, usually. They are taken out to cover the inevitable excess cost, especially for people attending expensive private universities. This money comes from individual lenders (Does the name Sallie Mae ring a bell?), which means credit history is considered and different lenders will offer different rates, but they’re always higher than the ones for federal loans. Private loans also have limited repayment options, which make less appealing than federal ones. Knowing for sure which types of loans you have can help you figure out or adjust repayment. The National Student Loan Database is a great place if you’re looking for an in-depth look at each of your loans.
Loan postponement periods exist and they offer a chance to get organized
Right after graduation, loan providers usually offer at least a six-month grace period to borrowers. It’s easy to delay or outright avoid getting your loan life together during that time, but you would be missing out on the chance to properly prepare a repayment strategy. These payments are going to be a part of your financial life for a huge chunk of your existence, so it’s important to figure out where they fit in as you balance saving money and paying other bills. You’ll also be dealing with different loan servicers – which will even change multiple times over the life of the loans – so this time can be spent finding out what each expects from you in terms of repayment amounts and due dates. If you have federal loans, it’s a good opportunity to talk with your service provider about which repayment options are available (we’ll talk about these in the next section). Also, setting up auto-payments through your bank account not only removes the hassle of having to remember to pay every month, but some private lenders may lower your interest rate for this, also.
Other than the automatic grace period, there are deferment and forbearance periods for federal loans, once you’re in the repayment period that you can apply for based on eligibility to postpone payments for a while. During deferment, you don’t make payments and interest doesn’t accrue. Interest does grow with forbearance, though.
Federal loans come with a lot of repayment options
The government just wants its money back, so you have eight plans to consider when repaying. Understanding what’s available to you can take some of the sting out of repayment and lessen the weight on your wallet. We’ll run through each briefly, but you can read about them in more detail here.
Standard Repayment Plan: Payments are a fixed amount for ten years. It’s the only loan option where you’ll pay less over time.
Graduated Repayment Plan: Payments start small and gradually increase every few years, for ten years.
Extended Repayment Plan: Fixed or graduated payments for twenty-five years.
Pay As You Earn Repayment Plan: Payments are 10% of your discretionary income and are recalculated every year. Any outstanding amount left after twenty-five years is forgiven, but you will have to pay income tax on what’s forgiven. It’s only available to people who became new borrowers in and after October 2007.
Revised Pay As You Earn Repayment Plan: Payments are 10% of your discretionary income and are recalculated every year. Any outstanding amount left after twenty-five years is forgiven, but you will have to pay income tax on what’s forgiven.
Income-Based Repayment Plan: Payments are 10 or 15% of your discretionary income. Any outstanding amount left after twenty or twenty-five years is forgiven, but you will have to pay income tax on what’s forgiven.
Income-Contingent Repayment Plan: Payments are the lesser of 20% of your discretionary income or the amount you would pay on a fixed payment for twelve years based on your income. Any outstanding amount left after twenty-five years is forgiven, but you will have to pay income tax on what’s forgiven.
Income-Sensitive Repayment Plan: payments are based on your annual income for fifteen years.
Some professions lead to loan forgiveness
Loan forgiveness for federal loans is “built into” a few career choices. That is, all or some of your student loans can be cancelled if you stick with certain named professions for a set amount of time. There are loan forgiveness programs for teachers, non-profit attorneys and some medical professionals. Volunteering with organizations like Peace Corps and AmeriCorps can also make some of your student loan debt disappear.
Defaulting on loans will make a real mess of your life
Not paying your loans monthly can be disastrous. Seriously, you should always pay, but you should know what would happen if you didn’t. In general, the timeline for default for federal loans goes like this: one missed payment is considered delinquency, at ninety days past due it’s reported to major credit bureaus, and at 270 days you’re in default. For private loans, default status is at the discretion of your lender, but it’s usually somewhere between 120-150 days without a payment.
Default wrecks your credit score and adds red flags to your credit report, which means you’ll be seen as risky to anyone you might seek credit or loans from in the future, and that could mean higher interest rates, if not straight-up denial. It’s far reaching, too, because banks sometimes pull credit reports for new checking and savings accounts. Your info will be sent over to collections and they will call incessantly. The government may even start garnishing a portion of your wages to collect on the debt. Private lenders can’t go after your paycheck, but they can sue you. According to a few horror stories found in Google searches, sometimes they actually do go after borrowers.