What New Graduates Should Do If They Can’t Repay Student Loans

What New Graduates Should Do If They Can’t Repay Student Loans

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by Vonda Sines

The ceremonies are over. The cap and gown is hanging in the closet. The parties are done, too.

What isn’t over is repayment of perhaps tens of thousands of dollars of student loans. And if you’re a recent grad without a job in hand, it’s a huge reality.

Washington Post financial columnist Michelle Singletary suggests that new grads should do just about anything they can to start paying off those loans. This means downsizing that cell phone contract when it’s up for renewal, getting a roommate, moving back home or even taking a second job if you’re already employed.

But what if you have no income? Singletary says that graduates who even suspect that they’ll have difficulty repaying their student loans should get in touch with the respective lenders right away to discuss their dilemma. The options vary according to whether the loans came from Federal or private sources.

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Many students who graduate without a job offer in hand are tempted big time to go directly to grad school. Singletary states that this is in most cases a bad idea because advanced degrees don’t guarantee big salaries. Students who borrowed to finance an undergraduate education will most likely have to do so to finish a graduate program, incurring tons of additional debt in the process. And with the tightening of criteria for student loans, they might not even be able to borrow more money.

A useful site for information on repaying students loans is www.finaid.org/loans/repayment.phtml. This site explains the various repayment options and has several calculators to help make a decision after considering the pros and cons of each.

If you’ve borrowed under a Federal loan program, here are some of the repayment options:

1. Deferment. Your loan payments will be temporarily suspended if you meet certain criteria such as unemployment or economic hardship. You won’t have to pay interest during the deferment if you took out a subsidized federal loan. Interest will continue to accrue and is capitalized if you don’t pay it if you have an unsubsidized loan.

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2. Forbearance. This is a way to reduce or stop making your payments for a specified period of time. However, interest continues to mount.

3. Graduated repayment. Under this option, you make low payments that represent only interest. These are followed by payments that include both principal and interest for the remaining term of the loan.

4. Income-contingent repayment. Based on your gross income, you might be able to reduce your monthly payment.

5. Extended repayment. If you owe more than $30,000 and qualify for this option, you’ll be able to stretch repayment up to 25 years. If you decide to consolidate your loans, you have an additional five years to finish paying.

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6. Income-based repayment. Your loan payments have caps based on your income and the size of your family using a sliding scale. For borrowers who earn less than 150 percent of the poverty level associated with the size of their family, the required payment is 0.

If your loan came through the direct and guaranteed Federal loan programs, you could be eligible for this option. However, this alternative is not available to loans taken out by parents.

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