As prospective college graduates consider ways to “give back” to their respective communities, banks and private donors begin to urge students to give back money they’ve borrowed in loans. It is imperative to learn the facts about grace periods, loan extensions and loan consolidation.
In order to figure out loan payments, identify what type of loan you have, as well as the payment plan for each, and recognize that there are different policies regarding interest payments.
According to fastweb.com, a website rich with information for college students and prospective college students alike, students should take their loan payments seriously and avoid going into default.
Default, the website defined, is failure on the borrower’s behalf to repay loans according to the terms of a promissory note, which can lead to legal action by the school, the lender, the state or the federal government to recover the money, loaned. The first step to avoid default is to find out when you have to repay loans.
For Direct or Federal Family Education (FFEL) student loans, loan payments, subsidized or unsubsidized, are to be paid back after a six month grace period from the day you leave school (whether you graduate or drop out) or declare part-time enrollment. If your have a subsidized loan, you can choose to pay the interest, or let it accrue (add up) until graduation.
For Perkins Loans, payments start nine months after graduation, or the date you drop below part-time status. Students are required to begin repaying Parent Loans for Undergraduate Students (PLUS) within 60 days after the last disbursement of the loan.
There are five ways to repay loans. Standard or Level repayment plans are most common. The payment plan specifies a set amount of money (at least $50) that should be paid every month for a fixed period of time up to 10 years. The disadvantage of this plan according to fastweb.com is, if you borrowed a lot of money, your payment will be large, but this plan keeps interest to a minimum.
The Extended Repayment plan is the second of the five ways to repay student loans. This plan specifies a set amount of money (at least $50) to be paid and offers an extended repayment period (between 12 and 30 years). However, the plan does increase the amount of interest.
The third option is the Graduated Repayment Plan. A student may start by repaying a small amount and increase it every two years until the loan is completed paid, which can vary between 12 and 30 years. Monthly payments with this plan may be easier to manage, because they are lower than a standard plan. But just as with the extended repayment plan, the interest over the life of the loan will increase.
Income Contingent Plans are another alternative, they are determined according to income and the total amount of loans borrowed. As the graduate’s income falls or rises each year, monthly payments are adjusted accordingly. In order to use this plan a signed form that permits the IRS to inform the U.S. Department of Education of your income is required. The amount of time allotted for the full payment of the loans, is often 25 years, but whatever you haven’t paid back after 25 years is taxed.
The Loan Consolidation Plan is the final repayment plan option for graduates. The plan combines student and or parent loans into one loan with one monthly fee. A new interest rate is then issued averaging the interests of each loan being consolidated. Through this payment plan, payment options are more flexible, and the payment process is often simpler. Monthly payments are often reduced because the term of the loan is usually extended. This plan does however increase the total amount of interest you pay
According to fastweb.com, interest rates are at historically low levels: 3.37 percent for Stafford loans in repayment and 4.17 percent for PLUS loans.