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What to Do If You Are Saddled with After-Graduation Debt

Tags:  Financial security, Life after college

Most people will tell you that by planning well before you enter college you can keep your after-graduation debt to a minimum. However, if you've come to graduation day and find yourself faced with a mountain of unpaid bills, you will need to devise a strategy of how to manage your finances.

Keep in mind that each of these actions are dependent on the type of loan you have -- usually FFEL or Direct Stafford Loans. Here are fifteen tips to consider.

Repay Your Loan

Repaying your loan should be your first choice of action once you graduate from college. You generally have a grace period before you have to start: six months for a Federal Family Education Loan (FFEL) or Direct Stafford Loan and nine months for a Federal Perkins Loan.

Consolidate Your Loan(s)

Every year the variable rates on school loans are adjusted. If you have variable rate loans, you may want to consider consolidating them into a single, fixed-rate loan when rates are lowered.

Defer Your Loan

There are several different loan deferment plans which will allow you to forego your regular monthly payments for a defined period of time based on specific hardships such as re-enrollment in school, unemployment or economic hardship.

Consider whether any of these situations apply.

§  Military Service. The College Cost Reduction and Access Act (CCRAA) enacted in September 2007 allows that individuals who are called to active duty during a war, military operation or national emergency may defer repayment for all periods of active duty service.

§  Active Duty Student. Members of the National Guard or Armed Forces Reserves or those in retirement status, who are called or ordered to active duty service may receive a deferment on title IV loans for up to 13 months following completion of service, if they were enrolled in a post-secondary institution at the time of or within six months prior to being called to service.

§  Economic Hardship.  A FFEL, Direct Stafford Loan, or Federal Perkins Loan borrower may qualify for an economic hardship deferment if the borrower's income does not exceed the poverty line standard or the minimum wage rate. This deferment may be granted for up to three years with a re-evaluation of the borrower's eligibility every 12 months.

§  Forbearance. If you are not eligible for deferment and are experiencing financial difficulty, you may be eligible for forbearance, which is a temporary postponement or reduction of payments. Forbearance can be granted at intervals of 12 months at a time for up to three years.

Keep in mind interest may accrue during any of these deferments or you may be responsible for continuing to pay interest during deferment.

Discharge Your Loan

If you are considering requesting a loan discharge, the holder of your loan can best answer any questions you may have. Here, however, are reasons you may be considering this action:

  • Total, Permanent Disability. If you are unable to work and earn money because of an injury or illness that is expected to continue indefinitely or to result in death, you must provide a doctor's certification that you are 100 percent disabled. Your loan will be placed in a conditional discharge period for three years and during this time you will not have to pay principal or interest. At the end of the conditional period, you loan will be cancelled as long as you continue to meet the total and permanent disability requirements.
  • School Closure.  If your school closes while you are enrolled so that you cannot complete your program, any U.S. Department of Education loan you obtained to pay for attendance at that school may be discharged. However, if you complete your program at another school after your loan is discharged, you may have to pay back the amount of the discharge.
  • Lack of Benefit. In some cases you may be able to discharge your loan if you can prove that you didn't benefit from the education. Generally having a GED or high school diploma is sufficient to establish your ability to benefit.
  • Refund Due to Lender. If your school owes a refund to your lender, you may be qualified for a partial discharge only on the amount of the unpaid refund.
  • Forged Signature. If you believe someone has forged your signature on your note or for an electronic transfer, you may be eligible for a discharge by submitting samples of your signature, as long as the monies were not used to pay for your school charges

Keep in mind you cannot typically get a discharge just because you were dissatisfied with the school's services or felt they provided poor training, had inadequate equipment or instructors, did not provide job placement or engaged in fraudulent activities (other than falsely certifying the loan).

Child Care Provider Loan Forgiveness Program

This program is designed to encourage more highly trained individuals to enter and remain in the early child care profession by providing those who work full-time in certain child care facilities that serve low-income families and who meet the qualifications of this program to receive up to 100 percent of their FFEL or Direct Loan forgiven.

For more information, you can contact the Child Care Provider Loan Forgiveness Unit at (888) 562-7002 (TDD: 1-800-877-8339).

Graduated and Income-Sensitive Repayment Plans

A graduated payment plan provides for short-term relief through low interest-only payments with gradual increases (usually every two years), while an income-sensitive plan offers you flexibility in your payments by basing it on your annual income; as it rises or falls, so do your payments.

Don't Default on Your Loan

If you decide not to make payments in line with the terms you signed up for, consider these consequences:

  • Your credit rating will be affected
  • You will be ineligible for future federal student aid
  • You may be subject to a garnishment of your paycheck or federal and state income tax refunds
  • You will have to pay late fees and collection costs
  • You can be sued

Loan Rehabilitation

If you have already defaulted on your loan, you may want to consider loan rehabilitation. Under this plan you and your loan holder agree to a reasonable and affordable payment plan for nine payments over a ten month period. This allows you to make nine voluntary payments which will be subtracted from the maximum repayment term of your loan and it removes the default status from your credit.

However, keep in mind that the monthly payment after rehabilitation may be more than the amount you paid before rehabilitation and outstanding interest will be added to your current balance.

While there are a lot of options on how to handle your college debt, it's clearly better to repay, whether you choose a short deferral, select income-sensitive repayment or select another option. The best plan is to decide before you graduate how you are going to repay your debt.


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