Student Loan Debt

Managing Your Student Debt

studentloan

The average undergraduate student will leave school carrying a debt load of nearly $30,000 between student loans, past due tuition along with credit card and personal debt. The fact that you have come to our web page indicates that you, like thousands of others, have reached a point where you need some help managing your financial affairs. The following information is meant to help you understand and handle not only your current debt but to offer fundamental information to use as a guide in your fiscal future.  One key point to keep in mind when you evaluate your current situation is to differentiate between “needs” and “wants”. For example, you need food, but you want to go out for an expensive dinner with your friends. You will need to keep your long-term goals in mind and not let short term desires get in the way!  The following list will give you some helpful hints as we focus on resolving problems and building a positive financial future.
Managing Your Student Debt  
If you have Student Loans, once you leave school the time frame before you are required to begin repayment is called the “grace period”. This period begins immediately after you cease to be enrolled at the school. During your grace period, repayment is not required and interest does not accrue (provided that the loan was subsidized by the government). A grace period is six, nine or twelve months long, depending on when you received your first loan and again during the Exit Interview. The length of your grace period was disclosed to you when you received the loan. The purpose of your grace period is to give you time to establish yourself financially. Repayment is not contingent on your ability to obtain employment. Therefore, it is important to take advantage of this time because once it has elapsed your student loan becomes due, whether or not you are ready to repay. During this time you should be actively seeking employment, accumulating savings or making other plans for your immediate future. Repayment of your student loans is very important. Prompt repayment of loans not only assists other students by making more loan funds available, but also keeps your credit rating in good standing. It is your responsibility to keep the school and each of your lenders informed of any changes in your address or name.  If you become delinquent or default on an educational loan it will affect your credit rating. The school is required to report delinquent Perkins and Health Professions Student Loan borrowers to a national credit-reporting agency. Federal authorities can withhold Medicare and Medicaid payments to physicians who are delinquent. The I.R.S. has been given the authority to withhold income tax refunds for certain delinquent loan borrowers. The Department of Health and Human Services actively pursues delinquent HEAL borrowers, taking steps including litigation, reporting the delinquency to credit reporting agencies, as well as other serious actions. Therefore it is important for you to communicate with your school or it’s agency to resolve any delinquency. If you have had a problem paying your Federal Student Loans you might be eligible for the following “Alternative Repayment Plans” or postponement benefits.   

Alternate Repayment Plans If all of your students loans, including consolidation loans, were first disbursed on or after July 1, 1993, you are entitled to an option of repayment plans: income-sensitive, graduated, or standard repayment plan. If you have loans first disbursed prior to July 1, 1993, your lender may (but is not required to) offer alternate repayment options.  Check with your lender or servicer to see what repayment options they may offer. Standard Repayment Monthly payments are equal throughout the life of the loan.  Interest costs are lower due to the fixed payments.

1.Graduated Repayment Initial monthly payments are lower and gradually increase over the life of the loan.  Payments may begin with interest-only payments and gradually increasing principal payments.  At minimum, monthly payments must equal the interest accruing each month.  Total interest costs will be higher than a standard repayment plan over the minimal principal reduction with the initial lower payments.
2. Income-Sensitive Repayment Your monthly payments are tied to your income and increase along with earnings.  Your lender will require annual certification of your income.  If the certification is not provided, your lender may exercise its right to convert your loan(s) to a Standard Repayment Plan.  A lender is only required to offer the repayment options to qualified borrowers once – generally, when they enter repayment after expiring their grace period. Total interest costs may be greater than those associated with Graduated or Standard Repayment Plan due to minimal principal reduction with initial payments.
3. Deferment Is a process in which you are allowed to postpone payment of the principal and/or interest on a student loan after the beginning of the repayment period.  Check promissory notes for specific deferment information on each loan.
4. Forbearance  Is a special arrangement made for financial hardship.  It is not a right.  The lender has the option to permit a borrower to postpone principal and interest payments.  The borrower is still charged interest.  The lender can require the interest be paid when due, allow interest charges to be capitalized, or permit you to make smaller payments for a specified period of time.  If you have problems making a payment, contact the lender immediately. These tips can help you handle the tab you ran up during your college days. By following a logical fiscal plan it will keep you from paying for some costly lessons in the future. Information that You Can Use ….about Federal Student Loans Student Loan Interest Deduction.  The Taxpayer Relief Act of 1997 restores the deduction for interest paid on student loans. These new tax breaks can significantly reduce the cost of repaying loans issued under the Federal Family Education Loan Program, but do come with a few strings attached. The following Q&A has been prepared to help answer general questions on how borrowers can take advantage of the student loan interest deduction, and if they are eligible to take this deduction. Clearly, their ability to claim this tax break depends on their individual circumstances. To determine whether they can benefit from the deduction, borrowers are urged to consult a qualified accountant or tax adviser.

Questions & Answers

Q: Just how much interest can borrowers deduct?

A: The Maximum deduction is $2,500.
Q: Who is eligible to take the deduction? A: In general, the deduction is available to any borrower with a qualified education loan who meets the required income test. The borrower may be a student or the parents or spouse of the student whose studies are funded by the loan. A student cannot file for the deduction if he or she is claimed as dependent on parents’ tax returns. A married borrower must file a joint tax return to claim deduction
Q: What are the income limits? A: The government applies different income limits, depending on the borrower’s marital status. The income limits takes into account the borrowers adjusted gross income. Single borrowers who report adjusted gross incomes of $40,000 or less will be able to take the full deduction. The deduction will be phased out for single taxpayers earning $40,000 to $55,000. Those earning $55,000 or more will not be eligible to deduct any student loan interest. Many, if not most, single college graduates can expect to qualify for the deduction, in full or in part. Married taxpayers who report incomes of $60,000 or less can take the full deduction. The deduction will gradually reduced for couples reporting annual adjusted gross incomes of $60,000 to $75,000. The interest deduction is not available to married taxpayers who earn $75,000 or more a year.
Q: Will the income limits be adjusted for inflation? A: Yes, But the new law stipulates that adjusted income level must be rounded down to the nearest multiple of $5,000.
Q: What loans qualify for the deduction? A: A loan is eligible if the proceeds are used to fund direct higher education expenses. Eligible loans would include: Federal Stafford Loans, Federal PLUS Loans, Federal and Direct Consolidation Loans, Federal Perkins Loans, Loans issued under the federal loan programs for  health care professionals, Education loans issued by banks and other private lenders, Loans issued to students or parents by schools.
Q:  Are there any loans that are not eligible? A: Borrowers cannot deduct the interest they pay on personal loans they receive from a relative.
Q: Does the taxpayer have to itemize deductions to claim the student loan deduction? A: No.  Borrowers will be able to claim the deduction whether or not they itemize their deductions.  Tax filers who use the short form will be able to deduct their student loan interest payments.   Q: Is there a limit on how long a borrower can claim the deduction? A: Yes.  Subject to the income test, a borrower may deduct the interest portion of loan payments made on or after January 1, 1998 provided that the borrower is still in the first 60 months of repayment.
Q: Can a borrower renew the deduction eligibility by consolidating his or her loans? A: No. Any months spent in repayment before the borrower’s loans were consolidated will count toward the 60-month limit for the deduction.  Consider for example a borrower who begins repayment of $20,000 in Stafford loans in January 2002, but two years later consolidates the remaining balance of the loans.  The borrower will be able to deduct the interest paid on the unconsolidated loans in 2002 and 2003.  In addition, the borrower will be able to deduct the interest paid on the consolidated loan during the years 2004, 2005 and 2006.
Q: How will the lender know how much interest to deduct each year? A: Lenders will be required to provide borrowers with an annual statement.
Consolidating Student Loans

If you have a sizeable student loan debt or make multiple payments to different lenders, you may want to consider loan consolidation.  Loan consolidation is a way of lowering monthly payments by combining several loans into one federal consolidation loan.   Loan consolidation can make a difference when it comes to managing your debt.  Consolidation has two primary benefits: your various student loans are combined as one loan, making it easier to handle payments and other transactions; and the longer repayment schedule can significantly reduce your monthly payment amount. This may also help you balance your personal budget and put yourself on the path to a healthy fiscal future.   To be eligible for consolidation, your loans must be in either the grace period or repayment period, or if in a delinquent or default status, will re-enter payment through loan consolidation. The length of the repayment period is based on the size of the debt. Loans eligible for consolidation are:

  • Federal Stafford (subsidized and unsubsidized)
  • Federal Insured Student Loans (FISL)
  • Federal SLS
  • Federal PLUS Loans
  • Federal Perkins Loans
  • Health Professions Student Loans
  • Health Education Assistance Loans (HEAL)
  • Nursing Student Loan Program (NSLP)

You should be aware that the Federal Consolidation Program is not always the best alternative for everyone.  Whether or not it is the most advantageous route for you depends on such factors as size of debt, how many lenders you owe, the interest rates of your loans, and whether you plan to exercise certain deferment or cancellation options.   You will have fewer deferment options under loan consolidation and cannot defer payment of interest.  If you choose to consolidate your loans, the total interest costs increase as a result of the extended repayment period.  Alternate repayment plans may be available to you.  Check with your lender or servicer to see if you may qualify for a graduated or income-sensitive plan.   Law Access Loans and Bar Examination Loans are eligible for consolidation through the Access Private Consolidation Loan Program.  The repayment period for this program may extend 25 years, depending on the amount you are consolidating.   Married couples can co-consolidate.  The couple must agree to be jointly liable for repayment with regard to change in marriage. Delinquent and defaulted borrowers are eligible for consolidation if the borrower agrees to “reenter repayment through loan consolidation.”  The borrower must have made satisfactory arrangements to repay with the insurers.