Repaying Student Loans—What To Do If You Get Behind in Payment
While Pell grants do not need repaid, other federal loans such as Stafford and Perkins loans do require students repay them by making monthly installments on the total amount owed. Unsubsidized and subsidized Stafford loans are monies based on income reported by students who need additional funds in order to attend online school. If eligible, students receiving Pell grants may find that tuition costs exceed the amount of the grant providing, necessitating extra funds for textbooks, lab fees, living expenses and other expenditures associated with participating in a full-time, online degree program.
The Federal Perkins Loan program is provided by the school at which a student is enrolled and allows needy students to take out low interest loans for the purpose of attending school. Repayment procedures for Perkins loans are similar to repayment guidelines regulating Stafford loans.
Students are required to start repaying loans six months after graduating from a school. If a student simply quits attending classes without graduating, he or she must still begin paying on loans six months following withdrawal from the school. Lenders or loan services must give students documents outlining loan repayment schedules that includes information regarding when each payment is due, how many payments will be made before the loan is paid in full, interest rates and any grace periods that may apply to late payments.
Grace periods may be extended for students who are on active military duty, re-enroll in school or if a student chooses to consolidate loans during the six-month grace period following graduation or withdrawal from school.
How are Payments Made?
Students can choose among several payment options when repaying Stafford and Perkins loans. These include:
- Paying via electronic debiting
- Arranging so that loan payments are automatically withdrawn from a bank account or credit card each month
- Mailing in a check or money order to the appropriate loan servicer address
What To Do If You Cannot Make Regular Payments on Student Loans
Graduates of degree programs face stiff competition in an economy that has yet to fully recover from the recession of 2008. While many will find jobs within the six-month grace period following graduation, hourly wages offered to college graduates are often not enough to compensate for the amount of their student loan debt. Furthermore, trying to make the required payments each month in addition to paying for living expenses is simply not feasible for many college graduates who cannot find work associated with the industry in which they have a bachelor’s or master’s degree.
Fortunately, government loan services offer several options for students struggling to avoid defaulting on loans. These include:
Deferment—the Federal Student Aid website defines deferment as a period of time during which paying the interest and principal of a loan is temporarily delayed. Students will not be penalized for stopping payment on the loan and the government may help the student by paying interest on a deferred loan. Loans eligible for interest payments provided by the government are Perkins, Subsidized Stafford and Direct Subsidized Stafford loans. Although students are relieved of payments until the deferment period has ended, it is still the responsibility of the student to pay for interest that accumulates during this period.
Many students apply for loan deferment due to unemployment or other economic hardships resulting from unforeseen events. Requesting a deferment involves filling out a form and submitting it to the appropriate loan servicer (online or through postal mail). Proof of financial status as well as submission of additional documents may be required before students are granted deferment status Perkins and/or Stafford loans.
Forbearance—forbearance is an alternative for students who do not qualify for deferment. While on the forbearance repayment plan, students do not have to make full monthly payments for up to one year but interest continues accruing on both Stafford loans as well as PLUS loans.
Discretionary forbearance may be granted if students experience financial hardships or serious illnesses that prevent them from working full time. It is up to the lender to determine whether sufficient evidence exists for a student to be give forbearance status.
Mandatory forbearance must be given to students due to the following reasons:
• The student is serving a dental or medical internship and/or residency program
• Monthly payment amounts for all loans is more than 20 percent of a student’s total monthly gross income
• The student is received a national service award and is currently serving in that same position
• The students is working as a teacher in an area of the country that qualifies for the Teacher Loan Forgiveness Act
• The student qualifies for partial loan repayment according to guidelines outlined in the U.S. Department of Defense Student Loan Repayment Program
What Does It Mean If A Student Defaults on a Student Loan?
When students do not make a payment for 90 days or more on a Perkins or Stafford loan, the service provider reports the delinquency to the three major credit bureaus: Equifax, TransUnion and Experian. Students who have not made a payment in nine months are considered in default of a loan and will experience one or more of the following consequences:
• Defaulting means you are no longer eligible for forbearance or deferment status
• The loan account will be assigned to a collection agency
• State and federal taxes owed to you may be garnished until the debt is paid.
• The total amount of loans will increase due to late fees, potential court costs, attorney fees and accrued interest
• Employers of students in default may have to withhold wages from the student’s paycheck (legally called a garnishment) and send the money to the service lender until the debt is paid
Additionally, students with outstanding loans should be aware that loans provided by the U.S. Department of Education cannot be discharged in bankruptcy.
The U.S. Department of Education is cognizant of the currently high unemployment numbers plaguing recent college graduates and offers a variety of options for students to take in order to avoid ruining their credit rating or going into default. For more information, visit the government’s repaying student loans web page to determine which plan may effectively benefit your situation.