For college grads, repaying loans is a multiple-choice test

Posted Friday, May. 16, 2014  comments  Print Reprints
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Payback time

Forbearance: With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will accrue on your subsidized and unsubsidized loans (including all PLUS loans).

Deferment: During a deferment, you do not need to make payments. To qualify, you must be unemployed, on active military duty, in the Peace Corps or in a similar situation. Depending on the loan, the government may pay the interest for a period.

Standard repayment: Equal monthly payments for 10 years.

Extended repayment: With consolidation, you make equal monthly payments for 10 to 30 years, depending on the loan balance. For example, $20,000 in debt qualifies for a 20-year repayment term, $40,000 for 25 years and $60,000 for 30 years. Without consolidation, you make equal monthly payments for 25 years, provided you have at least $30,000 in debt.

Graduated repayment: Payments start off low, at or slightly above the new interest that accrues, and rise every two years. No payment will be more than three times the first payment.

Income-dependent repayment: Plans base monthly payments on the borrower’s income, not the amount of debt.

Pay-as-you-earn repayment: The plan, available only to direct-loan borrowers with loans made since Oct. 1, 2011, and no loans before Oct. 1, 2007, bases monthly payments on 10 percent of discretionary income, with remaining debt forgiven after 20 years in repayment.

Income-based repayment: Available to both direct-loan and Federal Family Education Loan borrowers (depending on the lender), it bases monthly payments on 15 percent of discretionary income, with remaining debt forgiven after 25 years.

Income-contingent repayment: Available only to direct-loan borrowers, it bases monthly payments on 20 percent of discretionary income with remaining debt forgiven after 25 years.

Income-sensitive repayment (ISR): Available only to FFEL borrowers, it bases monthly payments on a percentage of adjusted gross income with no forgiveness.

Sources: Edvisors, StudentAid.gov

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Spring means college graduation for thousands of Texans — but it’s also a good time to take a hard look at student debt.

Texans account for about $70 billion of the $1.2 trillion in student loan debt held nationally. Even more worrisome, more than one-sixth of Texas borrowers will likely default within three years of entering repayment. The three-year cohort default rate in Texas, 17.3 percent, is higher than the national rate of 14.7 percent.

Those numbers come from the study “Financial Aid at the Crossroads: Managing the Student Debt Crisis in Texas,” written by TG, a nonprofit in Austin focused on educating parents and students about the cost and value of higher education.

“There is no reason for these borrowers to become delinquent or default,” said Kristina Tirloni, a TG spokeswoman. “There are many ways to find a repayment plan that fits their needs.”

The first thing borrowers should do is go through exit counseling at their schools to become aware of the repayment schedule and the available alternatives if they encounter a hardship like unemployment, TG says.

You have some time to establish yourself as a worker before you must start paying back government loans. Repayment doesn’t begin until six to nine months after you graduate or quit school, depending on the type of loan, with another nine months before the borrower is in default.

But if you don’t think you’ll be able to repay, start working on a program sooner rather than later. Once you’re in default, many repayment programs are no longer an option.

If you lose the information provided by your school, you can easily find a list of your federal student loans. Go to the National Student Loan Data System ( www.nslds.ed.gov) and select “Financial Aid Review.” Click on each loan to see who is servicing it. Be aware that this system will not show any private student loans.

If you can’t find a job or you’re underemployed, look into alternative payment plans offered by the government. At least 10 programs are available, including simply stopping or reducing payments for up to 12 months (forbearance) and using pay-as-you-earn repayment, a new option.

In conjunction with the income-dependent repayment programs, borrowers can have part of their federal student loans forgiven if they work in certain areas. Jobs under the Public Service Loan Forgiveness Program cover work for the government and certain nonprofits. Once the borrower makes 120 payments under the new arrangement, the rest of the debt can be forgiven.

Texas students rely more heavily on federal loans, according to the TG report.

“In recent years, the federal government has provided 84 percent of financial aid to undergraduate and graduate students in Texas, while students nationally receive about three-quarters of their aid from the federal government,” the report says.

“Additionally, just 38 percent of direct student aid to Texans comes in the form of grants, while approximately 62 percent is made up of loans. By comparison, loans make up just half of direct aid for the U.S. as a whole.”

Tirloni said Texans have a heavier load of federal loans for a couple of reasons.

“One is that state financial aid has decreased over the years,” she said. “There was some increase in the last session, but it was not enough to offset the cost increases.”

Also, the state’s large minority student population can end up overborrowing instead of looking for cost-saving alternatives like living at home, seeking scholarships or going to a less expensive school for at least part of college.

“Many are first-generation and have not saved or looked at other financial aid,” she said. “They take all the loans offered without the knowledge of where else to ask for aid.”

The report says Texas students are also not taking advantage of income-based repayment options. And the dropout rate in Texas is high, with just 56 percent graduating after six years.

Loans must be repaid even if the student doesn’t graduate.

TG has a customer assistance line to help borrowers navigate repaying their loans — 800-845-6267 or www.tg.org.

Take time now to sit down with your graduate and plan for those student loans.

Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net

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