Categorized | College

Dealing With Financial Aid Debt

Posted on 07 May 2009

There are several ways for the grad to conquer college debt.

Ah, college. It’s four, five, maybe even six of the best years of your life. Unfettered by responsibility, answering only to academia, you’re your own master. Living away from home, pulling all-nighters, studying and partying till dawn. That’s the life. Well, no longer, because the collection man cometh.

Unless you’re a trust fund baby or your parents did some fabulous financial planning in your first 18 years, you’ve probably incurred some financial aid debt. Finaid.com reports that the “typical undergraduate student completes college with $16,500 in student loans.” And you know what that means: payback. Finaid also points out several ways to approach your financial debt. Believe it or not, the government (yes, our bureaucratic, red-tape-tainted government) is pretty flexible about all this financial aid stuff. Let’s see if we can’t help ease your burden.

Basic Repayment
There are four major repayment plans available for federal student aid like the Stafford and Perkins Loans. If you don’t run into any major financial roadblocks that threaten to default on your loans, one of these repayment plans should work for you.

Believe it or not, you may never have to pay back your loans.

Standard. You’ve got up to 10 years to pay off this baby, with a minimum payment of $50 a month.

Extended. Depending on the amount you borrowed, you’ll have between 12 and 30 years to pay off the loan. Although it decreases monthly payments, it stretches out the interest and increases the total amount you’ll have repaid.

Graduated. With this plan, payments begin smaller and graduate every two years. You have 12 to 30 years to pay off the loan while keeping your monthly payments within set guidelines. Payments must be a minimum of $25 a month, no less than 50 percent and no more than 150 percent of the standard monthly payment, as well as greater than the interest it accrues.

Income Contingent. In this type of repayment, monthly payments are based on your income and your total debt. There is a five-dollar minimum monthly payment, and payments are adjusted as your incomes changes. The repayment period is 25 years, and any debt remaining after 25 years is discharged. Do know, however, this discharged debt is taxable.

Consolidation
Students with several loans have the option to consolidate their loans into one large loan with an averaged interest rate. Consolidations often reduce the monthly payments while extending the standard 10-year repayment period. The interest rate is based on the weighted average of the consolidated loans and will not exceed 8.25 percent. Depending on your financial situation, some other repayment schedules mentioned above may be more attractive than consolidation.

Loan Forgiveness
Believe it or not, you may never have to pay back your loans. Just do a little work for the government that covered your education expenses–military service, teaching, or practicing medicine in certain communities. Uncle Sam will forgive all or part of your debt.

A year in Americorps, time spent in the Peace Corps or Army National Guard, teaching elementary or secondary school to low-income families, and other approved activities will help you attain loan forgiveness. Don’t scoff just yet. If you’re career clueless upon graduation, these humanitarian efforts couldn’t hurt. They may be meaningful and debt-reducing at the same time.

On the Verge of Defaulting
OK, so you know those things called “credit reports” that help you buy your first car or first home? They don’t look so hot with a big red “loan default” emblazoned across the front. The last thing you want to do is default on your financial aid loans. There are several nasty repercussions that come with shirking on a government loan, including wage garnishing, being sued, and losing federal interest benefits. If you think you are on the verge of default, apply to postpone your repayment.

Deferment. If you apply before you stop payments and provide proof of why you need deferment, you can postpone repayment for a set period of time. It is not granted automatically and usually goes to those in dire financial situations: students enrolled in undergraduate or graduate school, disabled students in rehabilitation programs, or those who are unemployed or experiencing economic hardship.

Forbearance. If you do not meet the strict requirements for deferment, you can apply for forbearance–a postponement or reduction of your payments. You will have to continue to pay interest during the forbearance period, granted in twelve-month intervals for up to three years.

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