About Student Loan Debt
The average college student leaves school owing approximately $21,000 in student loan debt. Students who pursue graduate or professional degrees can expect even higher debt loads once they complete their education. Repaying that debt can be a significant financial burden on students, though there is some flexibility for many types of student loans.
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Types of Student Loan Debt
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College students have several options when it comes to receiving student loans to cover their education costs. The most common of these options is the Stafford loan program. Any student will be approved for this loan that is guaranteed by the government and subject to borrowing limits based on the student's years in school. Another government loan program is the PLUS student loan. Under this program, parents can borrow the money to pay for their child's education. Parents must pass a credit check to qualify. Finally, some students must take out private loans. Most of these loans will require a co-signer, usually a parent, and credit approval.
Interest Rates on Student Loan Debt
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The interest rates on student loans depend on the type you choose. Stafford loans have interest rates that are fixed by the government. However, the rates vary per year for new borrowers. For example, if you take out a Stafford loan in 2009-10 the interest rate will be 4.5 percent but if you take out the same loan in 2010-11 the rate will be 3.4 percent. Interest rates on PLUS loans are between 7 and 8 percent, depending upon which specific government program guarantees the loan. Private loans tend to have variable interest rates that are based on a financial index. For this reason, private loans tend to have higher interest rates and monthly payments than Stafford loans.
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The Grace Period
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Students who take out a student loan do not have to begin paying it back immediately as they would with other types of loans. This period of non-repayment is called a grace period. For both Stafford and private loans, students have six months after they graduate or drop below part-time student status before they must begin making payments. Interest does accrue during this period on all loans except subsidized Stafford loans. You can choose to pay the interest on the other types of loans during this period or you can have it added onto the principal. With the PLUS loans, parents can opt to begin making payments right away or to take the same grace period available to students.
Repayment Options
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Stafford loan borrowers have several options when repaying their debt. The standard option is make the same monthly payments for 10 years. By the end of the 10 years, the total debt must be paid off. For some borrowers, that option leads to excessive monthly payments. Three other options are available to make repaying the debt easier. You can extend the repayment period for up to 30 years, choose to vary the monthly payments so you pay less at the start and more at the end when you may be more financially secure, and ask for payments to be reduced based on your current income. PLUS and private loan borrowers have fewer options when it comes to reducing their monthly payments.
Dealing with too Much Student Loan Debt
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If you're still having trouble paying off your Stafford loans, despite taking advantage of the options above, you do have other options. You can sometimes defer payments under certain conditions, including returning to school at least part-time or entering the military. If you are facing an economic hardship because of unemployment or other financial problems, you can receive a forbearance which means you do not have to make any loan payments for a specified length of time. If you have multiple loans, you might want to consider consolidating them. By combining the amounts owed, you'll extend the life of the loan and end up paying less per month. Some programs allow portions of your Stafford debt to be canceled. For example, if you teach in an inner city school for a set number of years, the government will forgive a portion of your debt. Again, many of these options are not available to PLUS or private loan borrowers.
Defaulting on a Student Loan
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If you default on a student loan, you could face serious consequences. Private lenders can consider you in default if you are more than thirty days late on your payments. Government guaranteed loans, such as the Stafford and PLUS loans, will consider you in default if you are more than 270 days late on your payments. Once you go into default, your credit score is negatively impacted and your wages can be garnished. The federal government, for example, can take up to 15 percent of your wages to pay towards your student loans.
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