Handling College Loan Repayment

Exit loan counseling
Before young people leave school, they are required to participate in an exit counseling program. These programs educate borrowers on repayment options, deadlines, avoiding payment problems, and any other questions they may have. The programs explain borrowers rights and emphasize the consequences for defaulting on a loan. Failure to make timely payments can result in:

• Ineligibility for future federal student aid
• Additional late fees
• Collection costs
• A lower credit rating for your child

Repayment options
Most programs offer a grace period before payments are due. The grace period for a Federal or Direct Stafford Loan is six months; for the Federal Perkins Loan it's nine months, and for the Direct PLUS Loan (Parent PLUS Loan) it's 60 days. The exact amount of your monthly payment will depend on the size of your debt and the repayment period you choose.

Lenders normally allow you to select from four repayment programs to fit your budget:

• Standard plans charge a fixed rate and usually have a repayment period of 10 years.
• Graduated plans are paid over the same time period, but initial payments are smaller and increase every two years.
• Income-sensitive plans calculate the monthly payment as a percentage of the student's income and can be periodically readjusted with annual documentation.
• Extended plans are typically offered to borrowers with large loan balances. They allow the borrower a 25-year repayment period, resulting in lower monthly payments.

Not all lenders offer all of these programs, so be sure your child is aware of his or her options. The good news is that repayment plans can be changed during the life of the loan to fit changing situations. Interest paid on student loans may be tax-deductible, so talk to your tax adviser about the current deduction limits.

Deferment and forbearance
Lenders offer student loan deferments for a variety of reasons, but the most common are economic hardship, military deployment, and school enrollment. Deferment is limited to time frames that the lender determines. Young people may also qualify for forbearance, which allows them to suspend or reduce payments for up to one year at a time.

When young people can't make such large loan payments, they should contact the lender to determine if they qualify for a deferment program to avoid damaging their credit or becoming delinquent.

Loans can also be deferred if your child returns to school. Most lenders will automatically defer loan payment if the student is enrolled at least half-time in a qualifying program such as graduate school.

Consolidation
Most federal education loans have variable interest rates. With interest rates constantly fluctuating, consolidating student loans is a great way to lock in a lower interest rate for the life of the loan. Consolidation can result in lower monthly payments and eliminate the need to send multiple checks to different lenders each month.

After graduation is a great time to consolidate loans. Young people are then in their grace period and have plenty of time to complete application paperwork. They will also be fully aware of what their new monthly payment will be prior to the first due date. Some consolidation programs offer discounts for paying on time or having the payments automatically deducted from a checking or savings account. Parents can also consolidate any Parent PLUS loans they have taken out.

No matter how much information is provided on how to handle student loans, determining how and when to begin repaying them can be a daunting task. Be sure to take advantage of any resources offered to you and your child through the school or from the lender. Contact your trusted financial professional for more information and strategies to help plan and pay for your child's education.