When Grace Runs Out

For many of you who graduated college or any other tertiary institution this past spring, your monthly fixed costs are about to hike up.  As the 6-month grace period on your federal Stafford loans (subsidized and unsubsidized) comes to an end, it is time to revisit your payment strategies.  Here are some points to consider as you prepare yourself to tackle that debt:

  • Unemployment: If you are unemployed, call your lender immediately (before your first payment is due) and ask for deferment.  Generally, lenders will defer your loans twice, for one year each, if you are unemployed, but your loans, including subsidized ones, will accrue interest throughout the deferment period.  Once you do get a job, start paying back your student loans immediately to avoid unnecessary interest costs.
  • Consolidation: While most student loan providers have suspended consolidation offers in recent years, you can still consolidate your loans through the Department of Education’s Federal Direct Consolidation Loans program.  This program allows you to consolidate several loan types, including Stafford, Perkins, and PLUS, regardless of whether the loans are from the same lender or not.  You can choose to consolidate all of your loans or only some of them, and the interest rate of the consolidated loan will be the weighted average of the interest rates of the loans in the consolidation (The Federal Direct program’s website includes an online calculator that estimates your monthly payment and interest rate if you consolidate your loans).

Consolidation is a particularly attractive option this year if you have any variable interest loans (in general, Stafford loans disbursed between 1998 and 2006).  The interest rate on these loans changes every year and is based on the 91-day May Treasury-bill rate (2.30% + T-bill rate), which was at a historic low this year, 0.18%.  So if you consolidate all of your variable interest loans this year, you can lock in a rate of 2.48%.  Alternatively, you can consolidate these currently low-interest loans with other student loans you may have.

  • Repayment Plan: By default, lenders set your payment schedule to a “standard repayment plan” with a fixed amount due every month for 10 years, but you can change that at any time.  Two options that have existed for a while are the “graduated” and the “extended” repayment plans.  Under the former, your minimum payment amounts start low and increase every two years for 10-30 years until you pay off your loan.  The latter option, on the other hand, allows you to make your repayment period longer than what you were initially granted, up to 25 years, and can be used in combination with either the standard or the graduated repayment plan.  This extended plan is only available if you have $30,000 or more in student loans.

Now, the new plan people are talking about is the “Income Contingent Repayment (ICR) plan.”  Under this plan, your monthly payment amounts are based on your income and family size, and are generally erased after 25 years of repayment, even if you have not paid off your loan entirely.

Changing your repayment plan may mean you would spend more in interest payments.  However, if you cannot afford the monthly payment on a 10-year plan, having lower payments in your first few years or throughout an extended loan period could offer some relief.  Similarly, having a payment plan that is tailored to your income and family size should make repayment more manageable.  And in either case, paying more in interest in the long run is always a better option than being stretched out and risking having to skip on your monthly payments and incurring fees.

Your grace period is almost over, and if there’s one thing you should remember from your education when dealing with your loans, it is that the more prepared you are, the better your will do, and that procrastination, while tempting, is usually not a good thing.  Study your repayment options, assess how much you can afford in monthly payments, and be prepared when your grace period runs out.


One Response

  1. Happy to come to your site..full of good stuff.

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