David Lerner Associates: How to Deal with Student Loans
Many people who borrow money to get a higher education vaguely remember signing a piece of paper every year at college registration time. Now that they have graduated, it's all become painfully clear--those pieces of paper were promissory notes detailing student loan obligations. Loans aren't going to go away, and repaying them as quickly and easily as possible is the best way to move forward into a more secure, less stressful future. So whether it is a small sum or a small fortune to pay off, making sure knowledge of some student loan basics is essential.
First, remember the grace period
After graduation, there is a lot to think about--choosing where to live, finding a job, and even renting an apartment. Luckily, having to add student loans to that list too, is not essential, at least not for now, thanks to the grace period built into most student loans.
This grace period can be from six to nine months before having to begin repaying the burden of the loans. This time can allow a person to get financially settled (at least partially!), and examine repayment options before the drudgery begins.
Understand repayment options
Gone are the days when the only repayment option consisted of fixed, equal payments spread over a 10-year term. Though this is certainly one option, it's not the only one. Because of the increasing number of students who require student loans to finance their education, as well as the increasing amount of their debt, many lenders offer flexible repayment plans to help students manage this large financial responsibility.
- Standard repayment plan: This is the original repayment plan. With a standard plan, students generally pay a fixed amount each month for up to 10 years.
- Graduated repayment plan: With a graduated plan, student’s payments start out low in the early years of the loan but increase in later years (the term is still 10 years). This plan is tailored to individuals with relatively low current incomes (e.g., recent college graduates) who expect their incomes to increase in the future. However, this does mean they will ultimately pay more for their loan than they would under the standard plan, because more interest accumulates in the early years of the plan when the outstanding loan balance is higher.
- Extended repayment plan: With an extended plan, a graduate is able to extend the time to repay their loan, usually from 12 to 30 years, depending on the loan amount. The fixed monthly payment is lower than it would be under the standard plan, but again, this results in ultimately paying more for the loan because of the interest that accumulates under the longer repayment period. Note: Many lenders allow combining an extended plan with a graduated plan.
- Income-based repayment plan: With an income-based repayment (IBR) plan, a student’s monthly loan payment is based on annual discretionary income. After 20 years of on-time payments, their remaining balance may be forgiven (payments may be forgiven after 10 years for those in certain public interest jobs).
- Loan consolidation: Loan consolidation is technically not a repayment option, but it does overlap. With loan consolidation, a graduate combines several student loans into one loan, sometimes at a lower interest rate. This way they can write one check each month. To do this they need to apply for loan consolidation, and different lenders have different rules about which loans qualify for consolidation. However, with most loan consolidations, choosing an extended repayment and/or a graduated repayment plan in addition to a standard repayment plan is possible.
To pick the best repayment option, an individual will need to determine the amount of discretionary income that they have to put toward a student loan each month. This, in turn, requires them to make a budget and track monthly income and expenses to keep on top of things.
In addition to inquiring about repayment options, ask whether the lender offers any special discounts for prompt loan repayment. For example, some lenders may shave a percentage point off the interest rate if a college graduate allows them to directly debit their checking account each month. Or, the lender may waive some monthly payments after receiving on-time payments for a certain length of time.
Consider a deferment, forbearance, or loan cancellation if paying is too burdensome.
At times, finding it financially difficult or impossible to repay student loans can occur. Graduating college is not a guarantee of a job, and so cash flow can be an issue. The worst thing to do is bury one’s head in the sand and ignore payments (and the lender) completely. The best thing that to do is contact the lender and apply for a deferment, forbearance, or cancellation of the loan.
- Deferment: With a deferment, the lender grants a temporary reprieve from repaying the student loan based on a specific condition, such as unemployment, temporary disability, military service, or a return to graduate school on a full-time basis. For federal loans, the federal government pays the interest that accrues during the deferment period, so the loan balance won't increase. A deferment usually lasts six months. Be aware that the total number of deferments one can take over the life of the loan is limited.
- Forbearance: With a forbearance, the lender grants permission to reduce or stop loan payments for a certain period of time at its discretion (one common reason is economic hardship). However, interest continues to accrue, even on federal loans. Like a deferment, a forbearance usually lasts six months, and the total number allowed over the life of the loan is limited.
- Cancellation: With a cancellation, the loan is permanently wiped off a student’s list of financial obligations. It's not easy to qualify for a cancellation, though. Situations when this may be allowed are the death or permanent total disability of the borrower, or if the borrower takes a job teaching needy populations in certain geographic areas. Typically, student loans can't be discharged in bankruptcy.
Remember, these things are never automatic. Filling out the appropriate application from the lender, attaching any supporting documentation, and following up to make sure that the application has been processed correctly is not only highly recommended, it is imperative.
Keeping track of paperwork
Many graduates idea of organization is stuffing a random assortment of student loan papers into a cardboard box or sock drawer. Do not do this, rather, think again. Repaying student loans is a very serious matter, and students need to stay on top of it. It's important to keep accurate, accessible records. Open a file folder for each loan, and file any accompanying paperwork there, such as copies of promissory notes, coupon booklets, correspondence from the lender, deferment and/or forbearance paperwork, and notes of any phone calls and who the contact person was along with dates of the calls.
Investigate the student loan interest deduction
On the bright side, it is sometimes possible to deduct on a federal tax return some of the student loan interest paid.
In 2015, as a single filer with a modified adjusted gross income (MAGI) under $65,000 or a joint filer with a MAGI under $130,000, one can deduct up to $2,500 of student loan interest paid during the year. (A partial deduction is available to single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $130,000 and $160,000.) There are a couple of hurdles, though. For example, an individual must have incurred the loans when they were at least a half-time student, and they can't take the deduction if they are claimed as a dependent on someone else's tax return.
If a graduate paid $600 or more of interest to a single lender on a qualified student loan during the year, they should receive Form 1098-E at tax time from their lender, showing the amount of student loan interest paid for the year. For more information, see IRS Publication 970.
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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: http://www.davidlerner.com