Know your student loan rights
Recent college graduates who face a tough job market need to know their options for repaying their federal student loans.
This post comes from Aaron Crowe at partner site Credit.com.
Thanks in part to high rates of unemployment and underemployment, more students are deferring repayment of student loans -- at a time when students are graduating with more debt than ever before.
However, there are other reasons why a TransUnion study found that more than half of student loan accounts are in deferred status. For one, the large loan amounts don't register with them, says Tom Yarnell, director of financial aid at Otterbein University in Westerville, Ohio.
"I don't think they realize how long it takes to pay it back and the amount they'll have to pay back," Yarnell says. "Students at that age level have their eyes on something other than the borrowing amount and are pretty sure they'll be able to get a job and pay the loan back."
The loan amounts can be overwhelming. Student loan balances increased 75% between 2007 and 2012, with the average debt per borrower increasing by 30% to $23,829, according to the TransUnion study.
But there is some good news for students -- for those who have federal student loans, anyway. The interest rates on those loans are lower than private loan interest rates because they are subsidized by the federal government, and borrowers have more legal rights with federal loans than they do with private loans.
Here are nine rights students have for federal loans:
1. The right to loan counseling
Federal laws require loan providers to spell out the terms of loans to borrowers, but student loans are unique because they require borrowers to complete entrance and exit counseling before and after they get a loan so that they understand the terms, says Helen Nunn, director of financial aid at Susquehanna University in Selinsgrove, Pa. The National Student Loan Data System provides online counseling to explain loan terms and rights, and responsibilities of repayment.
"Once they get that far into the funnel, that they're actually signing up and receiving loan funds, there's quite a bit of information and counseling they have to do," Nunn says.
2. Right to contact your loan servicer
This right applies to all types of loans. But with federal student loans, the servicers that are contracted by the Department of Education to coordinate billing make it easy to contact them to answer questions, Nunn says. They also provide a lot of information.
"The loan servicer sends them all kinds of disclosures," says Greg Gearhart, director of financial aid at Messiah College in Grantham, Pa.
3. Right to defer payment
If you're in graduate school or the military, loan payments can be deferred until you're out. A hardship deferment can also be given to the unemployed, and forbearance is available if a borrower is sick and unable to work. Forbearance allows monthly payments to be discontinued or shrunk for up to 12 months. Interest will still accrue during that time.
4. Right to pay based on what you earn
Several programs can help with loan payments if you can't afford the loans you have. The "pay as you earn" plan puts the monthly payment at 10% of your discretionary income based on your income and family size. The income-based repayment plan is based on 15% of discretionary income. The income-contingent repayment plan is based on 20% of monthly discretionary income and is meant for low-income borrowers who don't qualify for the other plans.
Under the plans, if the balance isn't paid off by the end of the loan terms (20 to 25 years), then the remainder is forgiven.
5. Right to consolidate loans
If you have several federal student loans, you can consolidate them into a single monthly payment, making bill paying easier.
6. Right to loan forgiveness
If you work in law enforcement, early-childhood education, public health, emergency management, the military, school-based services and other public service jobs, you may be eligible to have your student loan balance forgiven if you've made 120 payments under the Public Service Loan Forgiveness Program.
Teachers in low-income communities can have up to $17,500 in loans forgiven under the Teacher Loan Forgiveness Program.
7. Right to change payment schedule
The standard loan payment schedule is for 10 years. An extended repayment plan can increase it to 25 years, which will decrease the monthly payment but increase the interest paid on the loan. For a grad with an increasing income, payments can be graduated and start low with increases every two years.
8. Right to deduct interest
Under IRS rules, federal student loan interest payments can be deducted from taxable income.
9. Right to repay early
This may sound like a no-brainer, but it's a right that borrowers don't always have. Student loans can be repaid early with no penalty.
Federal student loan delinquency rates rose 27% from 2007 to 2012, according to TransUnion, while private student loan delinquency rates dropped 2% during the same time. The potential worry, a TransUnion official says, is that such high delinquency rates for student loans could spill over into mortgages and other debt.
Student loan borrowers who know their rights, hopefully, won't fall behind.
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I've done extensive research in the Income Based Repayment Plan (IBR). My wife just finished graduate school with $150,000 student loan debt. The normal 10 year monthly payment would be $1760, but under the IBR plan she will only pay $400. The problem is the payment does not cover the interest which is about $800 per month. This places the loan into negative amortization. Over 25 years the loan balloons to $247,000. The government says it will forgive the balance, but you have to pay taxes on that amount. I project that $247,000 will push us into a 35% tax bracket adding $86,450 to our tax bill. We will have to set asside an additional $288 per month over 25 years to pay the taxes alone. Also, what if after 20 years the government says it can't afford to payoff these student loans and cancels the program? We will be stuck with a $200,000 debt.
My wife and I have decided to use the IBR plan for the first 3 years, because the interest is forgiven during that time. This will allow us to have kids and delay her working full time for a few years. I understand we have a unique situation. I want to inform others who graduate from medical, law, or any other high cost graduate program about the IBR trap. You can't hide from the tax man.
Don't buy what you can't afford. This includes education. Community Colleges, state universities, are good ways to save money.
Work while going through school. Don't borrow extra money for "living expenses".
Don't complain your loans debt is too much, you borrowed it.
4 years tuition at a public university - $28k
4 years room and board - $20k
Books and fees for 4 years - $6k
Working your butt off and graduating debt free in 4 years - priceless!
"Under IRS rules federal student loan interest payments can be deducted from taxable income."
Just don't do too well for yourself right. What's the cutoff now, 62k?
Number 6... Right to cronyism.
Number 7... Right to have to remind the lender to increase your payment every two years. For some reason, it seems to slip their mind when you're paying them interest for many years.
Number 12... The right of the lender to create an incomprehensible amortization table. 20 bucks principle, 200 interest today, 80 / 140 tomorrow.
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