Keeping an Eye on Loan Repayment as Your Child Graduates College

Your child's graduation from college is a great time to reflect proudly on his or her accomplishments. It’s also time to consider any outstanding loans that were taken out to fund your child’s education.

Exit loan counseling
Before a student borrower graduates from school, he or she is required to participate in an exit counseling session, either in person or online. The session educates borrowers on:

  • How to manage loans after college
  • Repayment options
  • Deadlines
  • Avoiding payment problems
  • Deferment

In particular, the session emphasizes the consequences for defaulting on a loan. Failure to make timely payments could result in:

  • Additional late fees
  • Collection costs
  • Ineligibility for future federal student aid
  • A lower credit rating for your child

So participation is important to the ongoing financial health of student borrowers.

Repayment options
Most programs offer a grace period before payments are due. The grace period for federal or direct Stafford loans is six months after graduation, and it’s nine months for federal Perkins loans.

For direct PLUS loans (parent loans), repayment generally begins 60 days after the funds are fully paid out. For parent loans disbursed on or after July 1, 2008, however, parents can opt to delay repayment until six months after the child graduates or ceases to attend school at least half-time.

Lenders normally allow you to select from six repayment programs:

  1. Standard plans charge a fixed rate and usually have a repayment period of up to 10 years.
  2. Extended plans are similar to standard plans, but generally have a repayment period of up to 25 years. This longer-term schedule allows for smaller payments. Keep in mind, however, that this also increases the total amount repaid over the loan’s life span.
  3. Graduated plans generally have a repayment term of 12–30 years, depending on the amount borrowed. The payments start small and increase every two years.
  4. Income-sensitive plans calculate the monthly payment as a percentage of the student’s income and can be periodically readjusted with annual documentation. The maximum repayment period is 10 years.
  5. Income-contingent plans consist of monthly payments based on the borrower’s income and total debt. The payments are adjusted as the individual’s income changes. The maximum repayment period is 25 years.
  6. Income-based repayment plans, effective July 1, 2009, are similar to income-contingent plans, but monthly payments are based on a lesser percentage of discretionary income.

Not all lenders offer all programs, so be sure your child is aware of his or her options. The good news is that repayment plans can be changed during the life of the loan to fit changing situations. Interest paid on student loans may be tax-deductible, so talk to a tax advisor about the current deduction limits.

Deferment and forbearance
Lenders may allow students to defer making loan payments, but they also have strict eligibility requirements for doing so. The most common reasons for deferment include:

  • Unemployment
  • School enrollment
  • Military deployment

Be aware that you may still be held responsible for paying interest on the loan while it is in deferment. And the lender will determine when you need to resume payments.

Young people may also qualify for loan forbearance, which allows them to suspend or reduce payments—typically in one-year installments—for up to three years. When young people have trouble making their loan payments, they should contact the lender to determine if they qualify for deferment or forbearance to avoid damaging their credit or becoming delinquent.

In addition, most lenders will automatically defer loan payment if the student enrolls at least half-time in a qualifying program, such as graduate school.

Consolidation
Most federal education loans have variable interest rates. Consolidating student loans is a great way to lower your monthly payment and lock in a lower, fixed interest rate (currently capped at 8.25 percent) for the life of the loan.

After graduation—and during the loan’s grace period—is a great time to consolidate. You’ll have plenty of time to complete application paperwork, and you’ll know what the new monthly payment will be prior to the first due date. Some consolidation programs offer discounts for paying on time or having payments automatically deducted from checking or savings accounts. Parents can also consolidate any PLUS loans they have taken out.

Determining how and when to begin repaying student loans can be daunting. Be sure to take advantage of resources offered to you and your child through the school or the lender. Contact your financial advisor for more information and strategies to help plan and pay for your child’s education.