Repaying Student Loans: What You Need to Know

I hear from so many of you who are confused about how to deal with repaying your college loans. The best move you can make is to follow the advice of college financing expert Mark Kantrowitz, who runs the finaid.orgwebsite.

Mark has a great cheat-sheet on student loan repayment basics. A few highlights I want you to understand:

You can’t consolidate private loans with federal loans.

Don’t choose a long repayment term with a private loan. The standard repayment period is 20 years, but if you opt for a 30-year repayment schedule your monthly payments will only drop by 10 percent, yet your total loan costs over the life of the loan will be two-thirds higher than if you had stuck with the 20-year repayment term.

Even if you can’t keep up with the payments, remember that current federal law prohibits a bankruptcy court from discharging your debt. That is, your student loans—both federal and private-stay with you even after bankruptcy. (Some members of Congress want this rule to change; it’s a long shot these days given the mood in Washington, but you should let Senator Richard Durbinand Representative Danny Davisknow that you hope they will reintroduce legislation they proposed that would permit private loans to be discharged in bankruptcy.)

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Try to negotiate with a private lender. To be honest, this is yet another long shot. Private loan lenders have no obligation to work out a deal with you; and the fact is that just like with so many of our current mortgage problems, many private student loans were “securitized,” meaning that many individual loans were packaged together and sold to investors. That makes it even more complicated to try and win a more lenient repayment deal. Still, it always is worth making a good-faith effort to see if someone will listen and work with you.

Consolidate all your federal loans through the government’s Direct Loan program.

Federal student loans offer a few different repayment options. Choose a repayment schedule that works for your circumstances. (Again, is a great resource for researching your options.) For example, with the “income-based” repayment schedule what you owe each month is based on a formula tied to your discretionary income, not what you owe. That can make the payments more manageable. And typically, after 25 years, any unpaid balance on that loan will be forgiven, though the amount of the “forgiven” amount will be taxed as ordinary income.

Public-service employees can qualify for loan forgiveness. If you work for a 501(c)(3) you may be able to qualify for the public service loan forgiveness program which will cancel the remaining debt (including accrued but unpaid interest) after 10 years of full-time employment in a public service job. This 10-year forgiveness for public service will be tax free.