Student Loans... what you need to know

If you hold a Perkins Loan and you read that loan agreement (and you did because they forced you to read the fine print in an exit interview before they would let you graduate) you would know that in periods of financial hardship the government pays the interest for you. All you have to do is apply for it. Same goes with Federal Subsidized Stafford Loans. But these loans then get bought and sold to third parties who will try to make up their own rules so know your rights and call the Ombudsman if you need help. Did I say Rosebud? No, the Ombudsman. Just go here: www.ombudsman.ed.gov/

No company is consolidating or refinancing loans since there is no profit to be made with such low interest rates since late 2008. Therefore the government has stepped in and anyone can consolidate a loan even if you only have one loan with the reason being "these terms are not suitable for me." You may be able to get your interest rate lowered this way. Of course you have to be in repayment and no longer in school on those loans for this to work. Exception: "Borrowers whose consolidation applications are received on or after July 1, 2010 and before July 1, 2011 may qualify to consolidate loans that are in an in-school status into a Direct Consolidation Loan."
If your loan is in default you can still consolidate under the Income Contingent Option which is the best option anyway (OK, second best, really.)

Go to: http://www.direct.ed.gov/student.html which links you to here: https://www.dl.ed.gov/borrower/BorrowerWelcomePage.jsp

Repayment Options:

Standard Repayment

Cheapest over time but may be impossible in that time frame unless you make a massive income or have a trust fund.

Extended Repayment

This is a new one. According to the Direct Loan site:

To be eligible for the extended plan, you must have more than $30,000 in Direct Loan debt and you must not have an outstanding balance on a Direct Loan as of October 7, 1998. Under the extended plan you have 25 years for repayment and two payment options: fixed or graduated. Fixed payments are the same amount each month, as with the standard plan, while graduated payments start low and increase every two years, as with the graduated plan below.

Graduated Plan

Smaller payments that increase every 2 years. You will pay more in interest this way.
It will take you more time to repay. No payment can exceed three times the first payment.

Income Contingent

Uses your income to calculate your payment based on federal income guidelines based on your AGI, family size, spouse, discretionary income, etc. and *. The goal is to not cause you financial hardship by such large loan payments you may have in the previous options. After 25 years of payments the government writes off your loans but you will pay the taxes on this as if it is income in that year. They have their own calculation for this that really makes no sense. Interest will accumulated on your loans, and will be added to the loan balance (capitalized) each year. "However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized." This means the interest you pay on your interest can only get so big, then you will stop paying interest on your interest.

Income-based Repayment

This is a new plan started by the Obama administration during the recent bank crisis when he realized the student loan crisis was larger than the mortgage crisis but to admit this would cause a national meltdown or err, cost the government more money in bailouts. The Administration also realized that all the options available were starving out the population or causing massive defaults and that the only way out was to add the 25 year clause to the last two options. Note this also allows you to go back to school!

Your payment will most likely be the lowest under this plan because A) you have to have at least a partial financial hardship and it is based on your income during this period and B) it is based on state income guidlines rather than federal.

Example A) in California the poverty line is under $34,000 and but under Federal the poverty line is is say under $18,000. The minimum wage is higher in CA than the Federal because it costs much more to survive there then say Texas or Washington where they don't have state taxes and outrageous rent.

Example B) under income contingent even though you have financial hardship and are unemployed your payment may be calculated and come up with the same figure as you were paying before you did all that paperwork and were under the graduated plan. This makes no point really, but that is how outdated the federal AGI standards are.

So go with the income-based plan if you can because in 25 years your loans are also forgiven with the same clause saying the balance will be added to your taxes as income on which you will be taxed in that year. (Of course they haven't really come out and said this because they don't want everyone to chose this option.) They use the term "may" in case we no longer tax our people at that time. Highly unlikely! If you carry a large loan balance this plan will allow you to eat, even if you have a job because remember, in California or or New York what is considered poverty is of course much higher.... Yay!



Per DL site: *Monthly discretionary income equals your AGI minus the poverty level for your state of residence and family size, divided by 12. For the current poverty level, see the Poverty Guidelines Chart, which is issued annually by the U.S. Department of Health and Human Services.


If you hold a PLUS loan that means your parents love you and took out the loan for you so technically they have to pay it back if you don't so you have less options. You have parents that love and support you so get over it! (For your options go to the DL site. You may be spoiled rotten but you still have options.)


If you insist on staying with Sallie Mae or some other multi-million loan sucking machine you should know that they can't force you to pay more than you can afford to pay under something called Title IV. Mention this and they will start stammering and act confused.


Well, I hope this helps!