Student Loan Repayment


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Armed with a college diploma and plans to find your first job, it will soon be time to face another reality -- paying back your student loans.

Student loans usually have a grace period of six to nine months. (Stafford loans have a grace period of six months. Perkins loans have a grace period of nine months.) In theory, a grace period gives you enough time to find a job and secure a source of income to repay your student loans.

Student lenders offer a variety of loan repayment plans limited only by lenders' marketing prowess. A standard repayment plan requires you to make regular monthly payments. At first, most of your payment -- perhaps all of it -- will go to repay any accrued interest. A graduated repayment plan allows you to make larger payments after an initial period. Most loan-repayment plans let you set up an automatic-payment plan that deducts payments from a checking or savings account.

The repayment period for most student loans is 10 years. If you make larger-than-expected monthly payments, your loan term will decrease and you will pay less interest. You may be able to deduct up to $2,500 of your student loan interest expense on your federal income tax return. As a result, you will pay a lower after-tax interest rate.

You may also wish to consolidate your student loans using a federal consolidation loan. Sallie Mae and other lenders offer these loans as a means of combining all of your student loans into one loan with a single payment.

The interest rate on a federal consolidation loan is calculated as a weighted average of loan amounts, rounded up to the nearest one-eighth (0.125%, 0.25%, 0.375%, 0.5%, etc.) of a percentage point with no rate ceiling.

Another repayment option is loan serialization. Loan serialization requires your lender to buy your student loans and stack them. You repay the most expensive loan first and then move on to the next-most expensive loan. For example, if you have a 7% and 6% Stafford loan, you pay off the 7% Stafford loan first and, next, repay the 6% loan. Certain types of student loans, including Perkins loans, cannot be serialized.

Whatever you do, don't suddenly stop making payments on your student loans. If you do, you will become delinquent and damage your credit history. If you continue to be delinquent, you will eventually default on your student loan, adversely affecting your hopes of borrowing from the federal government again, even for your own children's college. Defaulting on a student loan is, simply, a very bad idea.

If you face a financial hardship such as a job loss or a major expense, you should contact your lender immediately and request a loan deferment or forbearance. Either of these steps will allow you to temporarily stop making loan payments, or perhaps pay a lesser amount. Unpaid interest accrues during the period that you receive a deferment or forbearance.

You may be able to have some of your student loans forgiven if you work in public service. The Peace Corps and its domestic sibling, AmeriCorps, together with some military service options, have debt-forgiveness or at least interest payment programs.

If you file for personal bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, you may have your debts forgiven. However, a personal-bankruptcy filing remains on your credit history for ten years.

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