Struggling With Student Loan Repayment? Advice from NY Times

NY Times article today highlighted several student loan borrowers struggling with repayment as well as cohort default trends recently released by the Department of Education which increased to 6.9% for 2007 from 5.2% in 2006. 

Here is advice the article provided for students struggling with repayment of their federal loans:

You first need to figure out what types of loans you have: federal, private or a combination of both. You can find out by calling the lender, accessing the National Student Loan Data System of federal loans, or FinAid.org’s Web site. Below are several options for both loan types.

• Defer or Forbearance. All federal loans have a grace period of six months after graduation. But an unemployment or economic hardship deferment and forbearance can each buy up to three years, for a total of six years of relief. Defermentsare preferred because the government generally pays interest on subsidized federal loans, though you’re still responsible for interest on unsubsidized and PLUS loans. With a forbearance, you are responsible for all interest (even on subsidized loans), which is added to the loan balance.  “Students may not fully appreciate just how much that increases the size of the loan,” Mr. Kantrowitz said. “That’s why deferments and forbearances should mainly be used as a method to solve a temporary problem.” A six-month deferment is reasonable: it would add $345 to the balance of a $10,000 loan with a 6.8 percent interest rate.

• EXTEND TERM If you have taken a lower-paying job but expect to find a more lucrative one later, you may simply extend your loan’s term from, say, 10 to 20 years, though doing that may double your interest costs. You can go back to your original term the next year and there’s never a penalty for paying off principal early.

• Alternate Repayment. If you have taken a low-paying job and don’t expect your salary to jump significantly, experts suggest one of the alternate repayment plans. Starting on July 1, all federal loan borrowers will be able to consider the “income-based repayment” program, which limits your monthly payment to 15 percent of discretionary income (or income above 150 percent of the poverty line) and forgives the remainder after 25 years of payments. For government or nonprofit employees, any remaining debt will be forgiven after 10 years. And if you earn less than 150 percent of the poverty level, you won’t owe any money — and it will count as a repayment, said Lauren Asher, acting president of Project on Student Debt. To qualify, your debt needs to be high enough relative to your income. 

The income-contingent repayment plan is a similar program, but the payments are usually a bit higher.

There is a major caveat for both plans. If you do find a higher-paying job, and your payments didn’t cover all of your interest, those costs are tacked onto the loan amount.

For help in figuring out your best options, start by calling your lender. The Education Department’s Student Loan Ombudsman can also assist.

For private loans, general advice to struggling borrowers can be more challenging, according to Deanne Loonin of National Consumer Law Center:

“The private loan side is where we don’t have or are unable to give a lot of general information because there just aren’t as many rights.”

Related posts:

• Tips for repaying your student loans (January 8, 2009)
• How can I pay off my student loans:  Let me count the ways (March 25, 2009)