Student Loans: The Basics

I get asked a tons of questions about student loans, and it has started to occur to me that a lot of people who are swimming in student loan debt just get their monthly bill and pay it without really thinking about their other options.  Unfortunately for me, but fortunately for you, gentle reader, I've had to learn all the ins and outs of student loan management.  It's confusing stuff, but I think I can break it down into manageable chunks.  I do want to stress though that you shouldn't take anything I say as law, call your student loan servicing company and talk to them. I've called half a dozen times, and these people are really nice and want to figure out the best solution for your specific situation.  Also, I'm talking about student loans through the federal government, or Direct Loans.  If you loan has been sold to a company like Sallie Mae, your circumstances will be different.  To find out what's going on with your loans, go to the National Student Loan Data System.

The most important thing to remember, and I can't stress this enough, is that you cannot ignore your student loans. I don't want to repay mine either, but if you ignore them, you will ruin your credit score and your life.  By defaulting on student loans, you will end up paying more for every dollar you want to borrow in the future--house, car, whatever.  And whoever owns your loans will come after you to the point of garnishing your wages if necessary.  Student loans are the only debt that cannot be discharged by filing bankruptcy, so as distasteful and daunting as it is to look at that giant number, you have got to deal with it.

Consolidation--Consolidation is something that a lot of people do after graduation to make repaying their loans more manageable.  Basically, what happens for many people is that over the course of their college career, they end up taking out more than one loan.  If you are ever out of school for at least six months, you get a new loan when you re-enroll.  By consolidating those loans, you're telling your borrower that you want to merge them together into one loan with one interest rate.  This may make it easier in that you won't have to make more than one payment per month, but it could lock you into an interest rate that isn't very good. If you consolidate with only one loan, it's usually to secure an unchangeable interest rate for the duration of your repayment.

I haven't consolidated my loans because when I spoke to a loan counselor, she told me that I would be locked into a higher interest rate that would most likely go down.  My interest rate is variable, and I may consolidate in the future if interest rates go way down, but be cautious because you can only consolidate once. Interest loan rates are re-evaluated every year in July, but do talk to a loan counselor and see what he/she recommends before making your decision.

Deferment-- Deferment is a way of postponing making payments on your loans.  If you need to postpone payment, deferment is the most attractive option since your subsidized loans will not accrue interest while you are in deferment--typically, when you take out a loan, half the money you get is subsidized, the other half is unsubsidized.  As deferment is a rather attractive option, you need to qualify to get it.  Typically people qualify for deferment based on unemployment, disability or military service, but there is a big list of who is eligible.

Forbearance-- Forbearance is similar to deferment in that it's a request to stop making loan payments temporarily, but when you put your loans in forbearance, you are responsible for all the interest that accrues.  You can opt for forbearance at any time, and typically extend it as well, but while you are in forbearance your loan debt keeps building on itself and growing, so this should be only a last resort.  I've used forbearance in the past when I needed to save money for moving, but please be sensible about it if you take this option.

Default-- Default is when you stop paying your loans without arranging for a deferment or forbearance.  Letting your loans go into default disqualifies you for any type of loan forgiveness option that may present itself, and ruins your credit.  Considering that all you need to do to arrange a forbearance is to make a phone call and fill out a form, there is absolutely no excuse for going into default.  If you can't make payments for any reason, you have to be up front with your lender, and it will work out.  Going into default is not an option.

Up next: Repayment Options