Winthrop University: My Money Matters - Debt - Student Loans

Debt

Student Loans

The cost of higher education is not cheap, and appears to be rising nearly every year. In pursuit of these advanced degrees, many students find themselves taking on student loan debt in order to finance this education. Before you consider a student loan, here are two things that must be taken into consideration:

Subsidized and Unsubsidized Loans

One critical distinction between different types of loans is whether the loan is subsidized or unsubsidized. Generally speaking, a subsidized loan is one in which the borrower does not begin to pay interest on the loan until that loan is in repayment. When you borrow money for schooling, the repayment of that loan does not typically begin until after you have finished your program. Therefore, with a subsidized loan, interest does not accrue while you are still working towards your degree. With an unsubsidized loan, interest charges begin as soon as the loan money is dispersed from the lender to the borrower. For example, if you borrow money to attend a four-year college, interest on an unsubsidized loan is accruing the entire four years you are working towards your degree, even though you do not have to repay the loan yet. Over the life of the loan, the difference between a subsidized and unsubsidized loan can often be thousands or possibly even tens of thousands of dollars. Students should always seek subsidized loans first before considering any unsubsidized loans.

Repayment

Looking out into the future is always difficult to do, especially for young adults. However, it is always useful for you to consider what the repayment of your student loans will actually look and feel like. To illustrate this point, consider the following table:

Student Loan Debt Monthly Payment when Repayment Begins
$10,000 $101.24
$25,000 $253.11
$50,000 $506.22
$100,000 $1,012.43

The above numbers are approximations and assume an interest rate of 4% and a repayment term of 10 years. As you can see, the more money you borrow to finance your education, the higher your monthly payment is going to be when it comes time to repay that loan. Essentially, every $10,000 of student loan debt you incur will cost you about $100 per month to repay over ten years. To determine an appropriate amount of student loan debt for your education, consider the following questions: What is a typical starting salary in your field of your study?

Where are you most likely to live upon graduation ($40,000 in New York City is vastly different from $40,000 in Rock Hill, SC)?
Is your chosen career in high demand, or is there a reasonable chance it takes some time to find a job?

The answers to all these questions will be different for everyone and will depend on a host of factors, but considering them now will put you on a better path to managing your student loan debt responsibly.

Deferment

Under certain circumstances, you can receive a deferment or forbearance that allows you to temporarily postpone or reduce your federal student loan payments. Postponing or reducing your payments may help you avoid default. You’ll need to work with your loan servicer to apply for deferment or forbearance, and be sure to keep making payments on your loan until the deferment or forbearance is in place.

What is deferment?

A deferment is a period during which repayment of the principal and interest of your loan is temporarily delayed.

What happens to my loan during deferment?

During a deferment, you do not need to make payments. And depending on the type of loan you have, the federal government may pay the interest on your loan during a period of deferment.

The government may pay the interest on your subsidized loan, but it will not pay the interest on your unsubsidized loans (or on any PLUS loans). You are responsible for paying the interest that accrues (accumulates) during the deferment period, but your payment is not due during the deferment period. If you don’t pay the interest on your loan during deferment, it may be capitalized (added to your principal balance), and the amount you pay in the future will be higher.

How do I request a deferment?

Most deferments are not automatic, and you will likely need to submit a request to your loan servicer, the organization that handles your loan account. If you are enrolled in school at least half-time and you would like to request an in-school deferment, you’ll need to contact your school’s financial aid office as well as your loan servicer.

What is forbearance?

If you can't make your scheduled loan payments but don't qualify for a deferment, your loan servicer may be able to grant you a forbearance. With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans). There are two types of forbearances:

  • Discretionary
  • Mandatory

Discretionary Forbearance

For discretionary forbearances, your lender decides whether to grant forbearance or not. You can request a discretionary forbearance for the following reasons:

  • Financial hardship
  • Illness

Mandatory Forbearance

For mandatory forbearances, if you meet the eligibility criteria for the forbearance, your lender is required to grant the forbearance.

You can request a mandatory forbearance for the following reasons:

  • You are serving in a medical or dental internship or residency program, and you meet specific requirements.
  • You owe a total amount each month for all the student loans you received that is 20 percent or more of your total monthly gross income (additional conditions apply).
  • You are serving in a national service position for which you received a national service award.
  • You are performing teaching service that would qualify for teacher loan forgiveness.
  • You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
  • You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.

How do I request a forbearance?

Receiving loan forbearance is not automatic. You must apply by making a request to your loan servicer. In some cases, you must provide documentation to support your request.

What happens to the interest on my loan during forbearance?

Interest will continue to be charged on all loan types, including subsidized loans. You can pay the interest during forbearance or allow the interest to accrue (accumulate). If you don’t pay the interest on your loan during forbearance, it may be capitalized (added to your principal balance), and the amount you pay in the future will be higher.

Source: Federal Student Aid

 

Grace Period

There is generally a buffer between when you graduate and you have to begin paying back your student loans. This is known as the ‘grace period’ associated with these loans. Here are five facts you should understand about this grace period:

1. Your grace period begins automatically…
Your grace period starts as soon as you stop carrying at least half of a full course load. Definitions of half-time enrollment vary by school. It’s important to know how your school defines this—especially if your schedule changes.

2. …And so do your payments.
Once your loan’s grace period ends, it will automatically enter repayment. When repayment begins, you will be automatically enrolled in standard repayment. If your standard payments are too high, you can choose a different repayment plan that better fits your needs.

3. You can use your grace period more than once.
Each eligible federal student loan receives a single grace period. However, you retain your full grace period if you return to full-time student status before your grace period ends. For example, after using 4 months of a 6-month grace period, you return to at least half-time status. The next time you drop below half-time enrollment, you would still receive that full 6- month period.

4. Your grace period’s length varies.
Your grace period’s length depends on the type of student loan you have but generally ranges between 6-9 months. If you consolidate your loans, you may lose your grace period on loans that were not in repayment before you consolidated them.

5. You are responsible for knowing your grace period’s details.
Use the National Student Loan Data System (NSLDS) to stay on top of your payments and keep tabs on your federal student loans online. Remember, you are responsible for making your payments on time—even if you have not received a bill or payment notice. Contact your servicer (the company that sends your student loan bills) or lender to find out when your first payment is due, how much you owe, and where to send your payments. Also, begin repaying before your grace period ends if you can. You are not required to take advantage of your grace period.

*source: American Student Assistance

Last Updated: 7/13/22