This is the fourth post in a series about student loans by guest blogger Sharon Cabeen. Sharon is director of financial literacy program operations with TG. You can reach her at (800) 252-9743, ext. 6781, or by email at sharon.cabeen@tgslc.org. Additional information about TG can be found online at www.tgslc.org.

People go to college for many reasons – seeking new experiences and friendships, expanding their knowledge of the world, and, of course, enhancing their career options. For all the varied aims new college students may have, however, we can be sure they're not aiming for damaged economic prospects.

No one enters college with the thought, "I hope I default on my student loans one day."

Sadly, many student loan borrowers reach that destination despite never setting out to travel there. The reasons students default are nearly as varied as the students themselves: they may be struggling to find work after leaving school; they may be poorly organized, misplacing (or even failing to open) correspondence from their loan holders or servicers; they may have poorly understood their repayment obligation to begin with; or they may simply not have the money.

Consequences of default

Whatever the reason, failing to meet your repayment obligation can have unpleasant consequences. Even missing one or more payment deadlines will place a borrower's loan into delinquent status, potentially causing:

• Damaged credit, making it difficult to take out a car loan, obtain a mortgage loan, or even get approval on an apartment lease; and
• Increased costs, including late fees and the potential for increased interest rates.

If your student loan is delinquent for more than nine months, the loan is in default. Defaulting on a student loan has serious consequences, and may cause any (and many) of the following:

• The full amount of the outstanding balance will automatically become due and payable;
• Collection costs will be added to the balance due;
• The default will be reported to all nationwide consumer reporting agencies;
• The borrower will no longer be eligible for any federal student aid;
• The borrower may lose access to transcripts and academic records;
• The borrower may be subject to administrative wage garnishment, meaning money will be deducted directly from his or her paycheck, without consent;
• The borrower may forfeit any tax refunds; and
• In some states, the borrower may be subject to loss of lottery winnings, disbursements made by state authorities, or professional licenses, until the situation is resolved.

What now? Dealing with default

If you find yourself in default, don't give up! There are things you can do to improve the situation. In order to get back on track, you should:

• Contact the holder or servicer of your defaulted loan, which may be your student loan guarantor or the Department of Education. Your loan holder or servicer can counsel you about the best options for resolving your default. If you don't know your loan holder or servicer, you can find them by accessing the National Student Loan Data System at www.nslds.ed.gov.
• Establish a new repayment agreement by:
• Rehabilitating your defaulted loan(s). You can do this by making nine consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s).
• Consolidating your defaulted loan(s) and making three consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s).
• Stick to your repayment agreement. To get out of default, you must re-establish a good habit of making your student loan payments on time and in full.

One more thing: if you're still a student and need additional financial aid, you can also reinstate your eligibility for federal student aid by making six consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s). If you pursue this option, remember to apply for aid as early as possible. By having your financial aid application on file, your school can award your loan as soon as your eligibility for federal student aid is reinstated.

For more information

For more information about each of these options, visit TG's Repaying Defaulted Loans page.

This is the third post in a series about student loans by guest blogger Sharon Cabeen. Sharon is director of financial literacy program operations with TG. You can reach her at (800) 252-9743, ext. 6781, or by email at sharon.cabeen@tgslc.org. Additional information about TG can be found online at www.tgslc.org.

As we all know, the job market in the current strained economy is challenging at best, meaning that today's college graduates have to work harder to land job opportunities than their predecessors a few years ago. But of course, navigating the job market without a college degree can be more difficult still, making a college degree a crucial asset for every new job seeker.

Given these challenging circumstances, many recent grads may find it difficult to begin or continue repayment of their student loans. As I described in a recent post, the federal student loan program provides a variety of repayment plans to suit a borrower's needs. These plans can help lower monthly payments and (under certain circumstances) even forgive remaining debt at the end of a preset repayment period.

But what if these options don't go far enough? While flexible, these plans may not provide the immediate relief a borrower needs, or they may not address the particular circumstances a borrower faces.

Thankfully, borrowers have options. This post focuses on deferment, forbearance, and consolidation, paths that may help borrowers address these difficulties and stay on track for successful repayment.

Deferment

Sometimes, even a borrower's best-laid plans for student loan repayment can be affected by life's changes – such as the loss of a job, a difficult economic stretch, or maybe a decision to go back to school.

In situations like these, a borrower may not be able to make his or her monthly payment. To find relief, the borrower should consider applying for a deferment, which will allow him or her to postpone repayment of their loans. For subsidized undergraduate loans, the government pays the interest during the deferment period. Importantly, deferments are entitlements, meaning that if a borrower qualifies for one, the lender or servicer is required to grant it.

Nine types of deferment are available that cover a variety of situations. The most common deferments are in-school, unemployment, economic hardship, and military deferment.

Forbearance

If a borrower doesn't qualify for deferment, he or she may request a forbearance. Forbearance is similar to deferment in that it can provide a borrower relief from student loan payments. Under forbearance, a loan holder or servicer temporarily permits a borrower to cease making payments, provides an extension of time for making payments, or temporarily accepts lower payments than were originally scheduled.

Forbearance differs from deferment in that while a deferment is an entitlement, a forbearance is generally granted at the lender's discretion. As mentioned above, during a deferment, the interest on subsidized undergraduate loans is paid for the borrower. During forbearance, on the other hand, interest continues to accrue unless the borrower makes interest payments. The interest is capitalized, increasing the principal balance of the loan along with the amount of interest the borrower must pay in the future.

While obtaining a forbearance is better than missing loan payments, deferment is the less costly option. Borrowers interested in forbearance should check with their loan holder or servicer to see if they qualify for a deferment first.

Consolidation

For a variety of reasons, many borrowers have multiple loans issued by multiple loan holders. When they leave school, they find themselves having to make payments on each loan each month, with different payment amounts to different locations. Keeping up with all of this can be confusing, to say the least.

A borrower in this situation may be able to combine – or consolidate – them into one loan. Under this program, the Department of Education issues a new loan (the Consolidation loan) to pay off the remaining balances of each loan the borrower took out. The borrower then has to make just one monthly payment to one loan holder.

Borrowers can also usually extend their repayment period by consolidating, although this of course increases the amount of interest they pay over the entire repayment term. Because consolidation is often a one-time decision, however, borrowers should learn as much as possible before deciding to consolidate.

For more information

For more information about each of these options, as well as links to relevant forms borrowers can use to help choose one of them, visit TG's Helpful Repayment Options page.

This is the second post in a series about student loans by guest blogger Sharon Cabeen. Sharon is director of financial literacy program operations with TG. You can reach her at (800) 252-9743, ext. 6781, or by email at sharon.cabeen@tgslc.org. Additional information about TG can be found online at www.tgslc.org.

Thanks, Sharon, for providing this useful information for our readers.

As I wrote recently on this blog, college is an exciting, important time for expanding your horizons and preparing for your career and life to come. It's worthwhile financially, too: As reports continue to suggest, earning a college degree is one of the surest investments out there. (For a striking illustration of this, check out this chart from TG's Adventures In Education website.)

As with all investments, however, college requires an up-front financial commitment in order to reap the benefits down the road. For most students these days, that commitment comes in the form of student loans, and while it's easy to take advantage now of money you may not have to repay for years, eventually those bills start rolling in. Often, students take out loans with only a dim understanding of how their repayment obligation may affect them once they graduate. This post will focus on what students need to know in order to mange loan repayment in the way that works best for them.

First, borrowers should know that for most federal student loans, a "grace period" of six months begins once they leave school. This provides a welcome payment-free window in which to look for a job, move to a new permanent residence, and get organized in the working world. Borrowers should take note of when their grace period ends, however – it can be easy to lose track of when their student loan bills are coming due at the end of it!

Borrowers should be aware that during their grace period they can choose which plan they want to enter into for repaying their student loans. If they make no selection, they will automatically be entered into the standard repayment plan – which may or may not be the best choice for them.

So what options do borrowers have for repaying their federal student loans? Let's take a look at the six repayment plans federal student loan borrowers can choose from.

Standard Repayment Plan

Under this plan, borrowers repay their loans in fixed monthly amounts over a ten-year repayment term. The minimum monthly payment is $50 or the monthly interest accrued on the loan, whichever is greater. This plan generates the lowest total interest costs over the total repayment period. As mentioned above, this is the plan borrowers will automatically enter if they don't select a different plan.

Of course, for borrowers with substantial student loan debt, the monthly repayment amount under the standard plan may be difficult or impossible to manage on their current income. If this is the case, they may be able to choose other repayment options. These are described below.

Extended Repayment Plan

Borrowers with at least $30,000 in student loan debt can qualify for this plan, which lengthens the payment term from 10 years to at least 12 and no more than 25 years. Like the standard plan, under this option borrowers pay a fixed amount each month. Extended repayment lessens the burden of each monthly payment, but of course increases the interest amount paid over the total repayment period.

Graduated Repayment Plan

This plan provides for smaller monthly payments at the beginning of the loan term, then gradually increases the payment amount every two or three years. The repayment period is 10 years unless the borrower qualifies for extended repayment. Choosing this plan requires optimism on the part of the borrower that his or her income will increase significantly and regularly over the repayment period.

Income-Based Repayment

Income-Based Repayment (IBR) is the newest plan available for borrowers with high debt; it was introduced by the College Cost Reduction Act of 2007 and became available in 2009. Under IBR, monthly payments are based on a borrower's income, family size, and student loan debt. Borrowers can choose IBR if they qualify as having a partial financial hardship, which is determined by comparing the borrower's income to the poverty guideline for the borrower's family size.

Borrowers have to reapply for IBR every year, and so their payment amount may change every year. But the IBR plan can greatly reduce monthly payment amounts, and any outstanding principal and interest still owed after 25 years of qualifying payments will be forgiven. Borrowers can access an IBR calculator at www.AIE.org/ibr to estimate their monthly payment amount if they qualify for this plan.

Income-Contingent Repayment

As with IBR, under the income-contingent repayment (ICR) plan, the borrower's monthly payments are recalculated each year on the basis of the borrower's income, family size, and student loan indebtedness. Unlike IBR, if the payment doesn't cover the accumulated interest, the unpaid interest will be capitalized once a year, up to 10 percent of the original amount owed. If the borrower hasn't fully repaid his or her loans after 25 years, the remainder will be forgiven, but the borrower may have to pay taxes on the amount that is discharged.

ICR is only available on loans issued under the Federal Direct Loan Program (FDLP), in which the U.S. Department of Education acts as the lender. Beginning July 1, 2010, all federal student loans are originated under this program.

Income-Sensitive Repayment

Income-sensitive repayment is available on loans issued under the Federal Family Education Loan Program (FFELP), in which private lenders issued federal student loans. Beginning July 1, 2010, all loan originations ceased under this program, but many of today's student borrowers have FFELP loans. As with IBR and ICR, this plan adjusts monthly payments annually based on the borrower's income, family size, and student loan debt. Unlike IBR and ICR, the maximum repayment period under this plan is 10 years.

Learn more

For more information on each of these plans, as well as calculators to determine what monthly payments might be under each of them, visit the Department of Education's Repayments and Calculators page. For side-by-side charts displaying monthly payment amounts and repayment periods for each plan with various loan balances, visit TG's Comparison of Repayment Plans page.

This week, we're pleased to welcome Sharon Cabeen as a guest blogger to Plan Well, Retire Well. Sharon will be writing a series of posts on a financial issue that we have not addressed here before: student loans. Sharon is director of financial literacy program operations with TG. You can reach Sharon at (800) 252-9743, ext. 6781, or by email at sharon.cabeen@tgslc.org. Additional information about TG can be found online at www.tgslc.org.

College is an exciting time. It's a time for new friends and new experiences, for learning and for expanding one's horizons. Given this excitement, most new college students give little thought to what lies on the other end – entering the adult world, looking for a job, and, perhaps most crucially with today's high college costs, repaying student loans.

While no one wants to dampen the enthusiasm that comes with going to college, the unfortunate reality is that too many students leave college without a clear understanding of their responsibility to repay their federal student loans, or even of how they should go about doing so. Over the next couple of months, TG will be presenting a series of posts to help the readers of this blog – as well as the student loan borrowers they may communicate with – understand the repayment plans federal student loan borrowers can choose from, the options available should borrowers have difficulty with repayment, and the consequences of failing to repay student loans in a timely manner.

So what do students need to know as they sign on the dotted line – or, increasingly, as they press a button on their computer screens – for the student loans they need in order to pursue a higher education? For one thing, they should know that, for all the negative press associated with student loans in recent years, what often isn't emphasized are the positive effects of repaying student loans on time. These include retaining borrower benefits such as reduced interest rates, options for deferment and forbearance, and an improved credit rating.

Another thing recent graduates should be aware of is the possibility of having to make payments to more than one loan holder, involving multiple due dates and loan payment amounts. This circumstance can be confusing and cumbersome to manage, presenting a challenge to successful loan repayment.

Borrowers should also know that, as daunting as repaying their student loans may seem, they can choose from a variety of repayment plans to suit their income and their needs. Some of these plans can reduce the strain of high monthly payments for those with particularly substantial student debt. For those struggling to make payments at all, deferment and forbearance offer the possibility of postponing loan repayment until better financial circumstances arise.

Finally, students taking out loans should know that neglecting to make their student loan payments can lead to unpleasant consequences. These can include a damaged credit rating, increased financial burden from collection fees, and the possibility of garnished wages.

Clearly, new college students should enjoy the excitement and possibilities going to college offers. If borrowing for that education makes it possible, students should have no reservation about doing so. But they should also be aware of the obligation to repay their student loans, the repayment options available, and the benefits of managing loan repayment responsibly.

Look for a future post on the variety of repayment plans students can choose from, coming soon.

Sharon Cabeen