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Chapter 5: Student Loans

If you are like many of your fellow college students, you are receiving student loans to finance your higher education. While you are in school, you are probably not worried about your student loans, since the payments are deferred, but you will have to start paying them once you graduate or leave school.

What types of loans do you have?
Do you know what type of loans you have? Many students don’t – they just fill out the application package and take what they can get! You may have:

  • Stafford loans. Stafford loans are the most common type of loan offered by the federal government. They can either be subsidized (the government pays the interest on the loans while you are in school or deferment) or unsubsidized (you are responsible for the interest that is charged while you are in school or deferment – you can pay it as it accrues or have it added to the loan balance).

  • Perkins loans. Perkins loans are available to students with extreme financial hardship. These loans are always subsidized, and the interest rates are very low.

  • PLUS loans. PLUS loans are made to your parents or guardians, so they can help pay for your education. Are you expected to pay the PLUS loan back? That is up to your parents!

  • Private loans. The above-mentioned loans are public loans, meaning the government acts as the lender. However, some financial institutions offer their own student loans. Private loans often have higher interest rates and fees than public loans and usually do not offer the benefits mentioned below, such as flexible repayment plans and loan forgiveness. However, the amount you can borrow is typically higher.

If you do not know what types of loans you have, you should be able to find out with a little bit of research. Look through your loan documents, or call your lender and ask.

Repaying your loans
After you graduate from school or drop below a certain number of units, you will have a grace period, typically six months, before your first payment is due. It is best to make your payments on time. If you fall behind, your credit score can be damaged. If your loans are public, your wages can be garnished without a lawsuit, and your tax refund can be intercepted. Student loans are rarely dischargeable in bankruptcy, and since there is no statute of limitations on student loans, collection activity can continue indefinitely.

Many people struggle to pay their loans once they graduate, especially if they borrowed a lot. However, if you have public loans, there are options available that could make repaying them easier:

  • Forbearance or deferment. Getting a forbearance or deferment allows you to temporarily stop making payments. With a deferment, interest does not accrue on subsidized loans; with a forbearance, interest is added no matter what type of student loans you have. Forbearances are usually easier to obtain than deferments.

  • Alternative repayment plan. Unless you ask for something else, you are generally put on a standard, ten-year payment plan. However, you may be able to get a lower payment with an alternative repayment plan. (Keep in mind though, if the payments are lower, the total interest paid over the life of the loan will be higher.) In a graduated repayment plan, the payments start off small and increase over time. In an income based, income sensitive, or income contingent repayment plan, your income is taken into consideration when determining your monthly payment. The repayment period could be stretched up to twenty-five years with an extended repayment plan.

  • Loan forgiveness. In certain circumstances, you may be able to have all or part of your public student loans forgiven. Loan forgiveness programs may be available to borrowers who participate in volunteer work or military service, teach or practice medicine in certain types of communities, or meet other criteria of a specific program.
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