To be considered for student loans, you will need to check “yes” in the section of your Free Application for Federal Student Aid (FAFSA) form that asks about interest in student loans.
Interest rates on federal student loans range between 4 and 7 percent (those rates may change every year) for the life of the loan, generally with a ten-year loan term. No interest payments are required while you’re a student, as long as you attend at least half-time, though interest may accrue on your loan during that time. There’s a six-month grace period after you graduate, drop below half-time status, or leave school for any reason. Repayment begins at the end of the grace period and is made directly to the loan servicer.
You may be able to receive a deferment or forbearance on a Perkins Loan by applying to your college. During a deferment, you can temporarily postpone payments without accruing interest. If you’re not eligible for a deferment, you may qualify for a forbearance, which allows you to reduce or postpone payments for a limited period of time. Interest will accrue during this period, and you’ll be responsible for paying it.
Part of your Perkins Loan may be forgiven or canceled if you work full-time in certain occupations, such as teaching full-time at a low-income school or in certain subject areas where there’s a teacher shortage.
Parents of dependent students can also take out loans called PLUS Loans. To qualify, the parent must pass a credit check and will be held liable for the loan. Graduate students can apply on their own, and approval is based on their own credit score. The interest rate is fixed (the rate as of April 2020 was 7.08 percent), and repayment must begin sixty days after the loan is disbursed. The Federal Direct Loan Program will charge a 4.248 percent origination fee, which will be added to the loan amount.
Federal Direct Loan interest rates and fees are clearly displayed online at www.studentaid.gov. Congress periodically adjusts how interest is charged (fixed or variable) and the maximum interest rates that will be in place every school year. Make sure you’re looking at the most up-to-date information as you research your loan.
Consider having federal student loan payments automatically deducted from your bank account each month to shave 0.25 percent off your interest rate and to ensure you’re never late with a payment.
Student loans are the first real debt many people incur. Late payments or defaults can seriously harm your credit record for many years, but if you pay on time you can build a positive credit history that will help you qualify for a home mortgage, new car loan, or other type of credit. The federal government has made it increasingly difficult to escape your student loan debt, and there is no statute of limitations, so you can be sure it will dog you forever if you don’t pay.
If you don’t make payments for 270 days (around nine months), you’ll be considered to be in default of your federal student loan (timelines may be different for private loans). Once you’re in default, your loan servicer will file a default claim with the guaranty agency, which buys your account from the lender and assigns the loan to a collection agency. You’ll lose all the protections and options that come with federal student loans. The government also notifies all the credit bureaus.
If you don’t pay your defaulted loan right away, you could have your federal income tax refunds withheld and applied to the loan balance, have your wages garnished, have collection costs of up to 40 percent of the loan levied against you, and face possible legal action. If you have a professional license or certificate of any kind (medical, law, accounting, and so on), it could be revoked. You may no longer be eligible for federal financial aid programs. You also lose your eligibility for federal loans such as FHA and VA loans, which enable many people to buy a house that they wouldn’t qualify for otherwise, and you may be denied credit cards or other forms of credit. The government may even sue you and take your car, bank accounts, and other valuable property that you own and place a lien on your house, if you own one. The default will show up on your credit report for seven years and could affect your ability to rent a house or apartment, buy a car, qualify for a mortgage, or even find a job.
If you’re having trouble making your loan payments, you have several options. You could change your repayment plan, apply for deferment or forbearance, or apply for a loan consolidation that could reduce your monthly payments. If you’ve tried everything and are still having problems with your loan, contact your borrower advocate, who can act as a liaison between you and your lender and may be able to help find solutions to your problem. Lenders really don’t want you to default on your loan, and they’ll usually offer you a few alternatives—you just have to ask before it’s too late.
Once you’ve defaulted on your student loans, any unpaid interest is computed and the entire balance of the loan becomes due and payable immediately. Once you reach this point, you have several options to avoid the negative consequences of default:
When you come to a repayment agreement with your lender, guaranty agency, or collection agency, a new loan is created that wipes out the old, defaulted loan. Options may be different if you have private student loans rather than federal loans.
Rehabilitation is a federal repayment program offered to student-loan holders who have defaulted on their loans. To rehabilitate your loan, you have to make nine on-time monthly payments in a row. Then your loan will be removed from default status. You can only rehabilitate a defaulted student loan once.
Regaining Your Student Loan Benefits
Besides removing your loan default from reports to the credit reporting bureaus, rehabilitating your loan helps you regain your student loan benefits if you still need them and restores your eligibility for student financial aid.
Sometimes errors occur in student loan record keeping. If you believe there’s an error in your student loan—an incorrect balance, payments not credited, incorrect interest rate, incorrect personal information, or other error—contact the servicer that holds your loan. If you can’t resolve the issue on your own, as a last resort you can contact the Federal Student Aid (FSA) Ombudsman of the Department of Education by calling 1-877-557-2575 or writing to US Department of Education, FSA Ombudsman, PO Box 1843, Monticello, KY 42633. You can also fill out an online request for assistance through the FSA Feedback System at www.studentaid.gov.