The six-month grace period on student loans for the class of 2009 is about to expire, meaning this year's graduates will soon start getting their monthly statements. It could be a problem for those who have yet to find work.
One option for anyone in a financial squeeze is deferment or forbearance, which allow for the postponement of payment under select circumstances. If you need extra time to pay your loans, here's what you need to know.
ELIGIBILITY
A deferment or forbearance is a period when payments on a loan are not required, although interest generally continues accruing. The difference between the two is that the term "deferment" is used in specific situations with federal loans.
Student loans can be deferred if you enroll in graduate school or the military, are unemployed or are experiencing economic hardship.
To qualify for the latter, you can't earn more than $16,245. You're also automatically eligible if you get public assistance, such as food stamps, or volunteer with the Peace Corps.
If you don't qualify for a deferment, you might still be able to postpone payments if you're dealing with health issues.
DURATION
Economic hardship deferments are granted one year at a time, while unemployment deferments are granted in six-month increments. You can reapply for a total of three years each.
DRAWBACKS
These measures should be used as a last resort, since interest generally continues accruing on the loan.
One way to minimize the financial impact is to pay the interest costs while your loan is in deferment or forbearance. Otherwise, it will be added to the loan amount and push up what you ultimately owe.
OPTIONS
- One alternative is picking a payment plan that reduces your monthly bill. It will take longer to pay off your loans, which pushes up how much interest you pay.
- Another relatively new option for federal loans is the Income-Based Repayment program. The program caps monthly payments at 15 percent of your earnings above a certain threshold, currently around $16,000. Those who earn less than that might not have to make monthly payments.
Any debt remaining after 25 years is forgiven. Eligibility is determined by weighing your debt level against your income. A calculator at www.ibrinfo.org can help assess whether you qualify.
DON'T DEFAULT
A default sets off a chain of damaging repercussions.
It's a black mark on your credit report.
In default the entire balance of your loan becomes due. Your loan might be turned over to a collection agency, and you'll be liable for the costs of collection.
Your wages could also be garnished, and your federal and state tax refunds could be intercepted.
Student loans typically aren't discharged with a bankruptcy. And once the loan is in default, you can't get a deferment or forbearance.
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Paying all debts creates blessings in our life; when we don't, we are stealing someone's money. Never give up on repaying a debt no matter how long it takes. If it was owed to you, you would want it paid.