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Understanding Your Loan Repayment Options

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Student Loans: Understanding Repayment Options

Student loans are often a necessity to cover the costs of college or university tuition. After graduation, however, many students are unprepared to cope with the sometimes convoluted nature of payback options.

Most college loans do not need to be paid back while a student is in school or even for months after graduation, but when payments are required, it is imperative that students make timely payments.

From loan deferment to consolidation, here are some of the options graduating college seniors have when it comes to student loans.

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Postgraduation Grace Period

Most students are not fortunate enough to say that they will be jumping straight into a job after graduation. Some will go onto graduate school, and others will wade into the working world. Whichever path is taken, students are usually not rolling in money during the immediate months after graduation. For some, it's a nearly impossible feat to start paying back student loans right after graduation. For this reason, almost all student loans offer a period of months in which repayment is postponed.

This grace period, as it is referred to by lenders, varies depending on the type of loan a student takes out. Some offer a three-month grace period, while others allow students to take up to nine months before they are expected to make regular repayment installments. Government loans, such as the Stafford and Perkins loans, allow six-month and nine-month grace periods, respectively. Some lenders do offer extensions on a grace period because of financial hardship, but these are granted on a case-by-case basis.

The grace period also differs in the way student loan interest is paid. Some lenders add the interest to the amount owed during the grace period, while other types of loans pay the interest during these months.

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Student Loan Deferment

A deferment in the student loan world means that in certain, pre-approved circumstances, a student can opt to temporarily stop making payment installments to their outstanding debt. A deferment is a right all loan holders can take advantage of if the situation is approved by the lender. When a student is in deferment, he or she has the choice to make interest payments on loans, or allow the interest to build onto the principal. This is how deferment differs from forbearance, in which loan holders must pay the interest. Some loans, such as the subsidized Stafford Loan, do not accrue interest during a deferment period. In this case, the government pays the outstanding interest. Most loans, however, will accrue interest during deferment.

Not every situation deems a loan holder eligible for deferment. There are only a few circumstances, which must be proved and documented for the lender, that qualify someone for deferment. Furthermore, each type of loan has its own deferment guidelines. A circumstance in which just about every lender will allow deferment is if a person decides to go back to school on a more than half-time basis. Once accepted, and a loan holder is attending classes, the lender will put the deferment into action. Some other instances when deferment could be allowed is if a loan holder decides to join a governmental volunteer service such as AmeriCorps or the Peace Corps, or if a person can prove financial hardship or an inability to find a job.

How long can I defer my student loan payments?

The length of time students can defer their loans depends on the type of loans that they have. Subsidized loans, such as Stafford and Perkins loans, can be deferred for up to six months after graduation. These loans can also be deferred if students have part-time enrollment status at a college or university. Students can also receive deferment for up to three years due to the inability to find full-time employment or demonstrable economic hardship. These special deferments require applying to the appropriate group -- the school, lender, or agency that made the loan. Students must continue to make payments on their loans until approval for deferment is received, or they risk defaulting.

Some active duty military personnel may also qualify for deferment. Soldiers who are on active duty during a war, a military operation, or national emergency may defer their loans for a total of three years.

Unsubsidized loans, such as PLUS loans may be deferred as well, however the process differs from subsidized loans. With subsidized loans, the government pays the interest on the loan while it is being deferred. In the case of unsubsidized loans, interest accrued during the period of deferment is added to the principle amount and must be paid back after deferment has ended.

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Student Loan Forbearance

Forbearance is similar to deferment, but in forbearance a loan holder is still required to pay the interest that accrues on their outstanding balance. Also, forbearance is granted by the lender; no loan holder has the right to forbearance, as in deferment. The process begins when a lender gives permission to a loan holder to postpone payment of the loan principal. There are, however, only specified reasons a lender will allow forbearance. Financial hardship, teaching in a teacher-shortage area, or an unusual life circumstance are the main reasons for forbearance.

Lenders are very particular about giving permission to forbear a loan. A person must have a good history of repayment and cannot be in loan default to be eligible. Some of the most common conditions in which forbearance is granted are if a loan holder is unable to work due to poor health or personal problems, is serving a medical or dental internship or residency, or is serving in a governmental volunteer service position. Each candidate for forbearance is considered on a case-by-case basis. Loan holders should check with their respective lenders for details on how to apply for forbearance.

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Student Loan Cancelation

Student loans are just what they sound like -- something that is loaned out and must be given back. However, there are a few situations in which certain types of loans can be canceled, and thus, not paid back. The Perkins Loan, for example, might qualify for cancellation if the loan holder works as a teacher in a low-income school for five or more years. This condition is special to the Perkins Loan and does not necessarily apply to all types of loans. Some Stafford loans may also qualify for this type of cancellation.

More dire conditions that could allow for a loan cancelation are permanent disability or death. If a loan holder is deemed too disabled to work because of an accident or other unfortunate life situation, he or she may have their loan canceled. This condition is decided on a case-by-case basis. Also, in the event of a loan holder`s death, a student loan is canceled instead of being passed on to family members. Each loan works in unique ways, so it is best to check with specific lenders for details on cancelation options. Do take note, cancelation is only granted in very specific or dire situations.

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Defaulting on a Student Loan

Being in default of a student loan, or any loan for that matter, is considered by lenders to be an act of irresponsibility. Loan holders who have not made payments for over 270 days are considered officially in default of their loan because it is the obligation of any loan holders to repay the money lent to them. Most student loans are generally not discharged or canceled under bankruptcy. Therefore, in the case of financial disparity, lenders will go to many lengths to collect money from loan holders in default.

Some of the consequences that default loan holders may endure include being reported to a credit collection agency and credit bureau, having part of their personal paychecks withheld for loan payments, having collection costs added to the outstanding loan, and being taken to court. Statistically, most loan holders who go into default are those who started school, but never finished their studies with a degree.

It is in your best interest, as well as your credit's best interest, to never allow yourself to enter into default. Default will follow you around for years to come and will make simple credit checks difficult and frustrating. If you feel that you may enter into default, contact your lender immediately and begin brainstorming other options. The longer you wait, the harder it will be to come to a mutually beneficial solution

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The Pros and Cons of Consolidating Student Loans

Consolidating student loans is a popular option for many recent graduates. This article will discuss the pros and cons of undertaking such an action.

The Pros of Consolidating Your Student Loans:

1. You will have one single monthly payment.
Instead of worrying about loans from multiple collectors, you will be able to pay all of your loans in one lump sum. This will strongly detract from any confusion you may have had when paying your bills every month.

2. You will have manageable monthly payments.
By consolidating your loans you open yourself up to new repayment plans. This means you may have extended repayment, graduated repayment, and income contingent repayment. These alternative payment plans often reduce the size of the monthly payment greatly.

3. Your interest rate on the PLUS loans will be reduced.
The 8.5 percent fixed rate PLUS loan reduces the interest by .25 percent after consolidation. However, in order to save the maximum amount of money, you must consolidate your PLUS loans separately from your other loans.

4. Consolidation resets deferments and forbearances.
By consolidating your loans, many deferments and forbearances are reset to their original three-year payback time. Research your personal deferments and forbearances to see if this applies in your situation.

5. There is no fee for consolidating your government student loans.
You do not need to worry about extra costs sneaking up on. When you consolidate your loans, you won't be footing any kind of new bill.

6. There is no credit check when you consolidate you loans.
If you know you have poor credit, rest assured: There is no credit check for consolidating loans. You will not be turned away from this opportunity because of a few missteps.

7. You will not be penalized for paying off a loan early.
Obviously, if you choose to pay off your loan early, you will be better off. Loan officers encourage you to make these payments earlier rather than later.

8. The consolidation application is very simple.
Many people worry that consolidating their loans will be a complicated and time-consuming process. This is not the case. Consolidating loans is a fairly easy process that will be well worth it. There is only one application to fill out and it doesn't cost anything.

9. You can switch from one lender to another.
Consolidating your loans will enable you to switch from one lender to another. If you do your research before you pick a lender, you might be able to get a better discount on loan interest rates.

10. Lenders usually seek out your business.
To entice you to consolidate your loans, lenders will give out incentives such as borrow benefits and rewards that can offer cash back, reduced rates, principal reductions, and many other helpful gifts.

The Cons of Consolidating Your Student Loans:

1. If you have relatively new loans, you won't save very much with consolidation.
Interest rates on federal loans made after July 1, 2006 are fixed. Since the interest rates for consolidation loans are determined through calculating the average interest rates of the loans you are consolidating, chances are your interest rate will end up being about the same.

2. Consolidation often creates more overall costs in interest.
While it is true that consolidating your loans will extend repayment and lower monthly payments, it may create more costs over the life of the loan and into your future.

3. You may suffer a loss of a grace period.
If you choose to consolidate during your grace period, you must begin repayment immediately and forfeit the remainder of your grace period. However, you can still apply for a deferment in this period if you're unable to payback your loans right away.

4. You will lose your subsidized interest benefits on the Perkins Loan.
Although the interest benefits on a Subsidized Stafford Loan stay with you after consolidation, the same does not apply for the Perkins Loan. The government will not continue to pay the interest on the portion of the consolidated loan that resulted from the payoff of a subsidized Perkins loan while you are in school or during periods of deferment.

5. You will lose other benefits on the Perkins Loan.
By consolidating your loans, you will lose the Perkins' nine-month grace period and the Perkins Loan's favorable forgiveness provisions. 

In short, if you have the Perkins Loan, you may want to reconsider consolidating your loans. It could hurt you more than help you. If, on the other hand, you have been having a difficult time keeping track of your many loan payments, consolidating may be a good option with many intriguing benefits.

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