Repaying Federal and Alternative College Loans

It’s not easy to pay student loans when jobs for recent college grads are on the decline. It may take you several months to find a job once you graduate, and even then the salary may not be what you expected. Here is some information that may help to successfully repay student loans:

Repaying Direct student loans

Deferment & Forbearance – Direct loans come with deferment and forbearance options that you can exercise under various circumstances, including during times of economic hardship. Both of these options allow you to temporarily postpone or reduce your payments.

Repayment Plans – Various Direct loan repayment options may be available. Some of the most common ones include Standard, Graduated, Income-Sensitive and Income-Based repayment. If you have difficulties with repayment of your federal student loans, consider speaking with your lender or servicer about switching to a different repayment plan.

Repaying alternative college loans

Deferment & Forbearance – Each lender decides whether they will offer deferment and forbearance options to postpone payments during times of economic hardship or if you return to school. Before you take out alternative college loans, it’s important that you research your lender’s deferment and forbearance policies. If you have already taken out alternative college loans, contact your lender(s) for this information.

Repayment Plans - Each lender’s loan program defines their repayment terms and program requirements for their alternative college loans. Some alternative college loans may have longer payment terms (up to 20 years). Remember that although your monthly payments may look lower and easier to manage, you will pay significantly more in interest on a 20-year term than you would on a 10-year term.

The most common repayment plans for alternative college loans are Standard and Graduated. The Standard alternative student loan repayment program features the same payment each month throughout the term of your loan. If you qualify for a Graduated repayment plan, this option allows you to make interest-only payments for a defined period, usually two years. Your loan is then re-amortized for the remaining term which will result in higher monthly payments.

Consolidating Alternative College Loans

Not all borrowers can or should consolidate alternative college loans. Just like when you applied for your alternative college loans, alternative consolidation loans are also credit-based and you will need to be approved. If you are a new graduate with little history, or you have bad credit, it will likely be difficult for you to obtain an alternative student loan consolidation without a co-signer. That being said, some benefits of an alternative student loan consolidation include:

1. Lower Monthly Payments

   Many alternative college loans are made with a ten year loan repayment term. If you have significant loan debt, your monthly payments could be extremely high, especially as a new graduate earning an entry-level salary. Alternative student loan consolidation may enable you to extend your loan term, thereby lowering your monthly payments.

2. Potential for a Lower Interest Rate

   While you were in school, you probably didn’t have enough credit history to take out alternative college loans on your own. If you used a co-signer to help you get approved, the interest rate on your loans was most likely based on your co-signer’s credit history and the underwriting criteria of your lender. Once you establish income and build a positive credit history, you may want to try applying for an alternative student loan consolidation. You may be able to reduce your interest rate and save hundreds or thousands of dollars in interest savings. If you still can’t qualify for a lower interest rate, ask your consolidation lender if you can apply with a co-signer.

   Keep in mind that lenders generally charge an origination fee for your new alternative student loan consolidation. You will want to weigh this fee against your interest savings to see if you will benefit from a consolidation.

3. One Monthly Payment

   In addition to lower monthly payments, many borrowers enjoy the convenience of having to make only one student loan payment every month. If you have federal student loans, make sure you keep them separate from your private loan consolidation. You can consolidate your federal loans separately using a federal loan consolidation with the Department of Education. If you want to consolidate your federal loans, visit the government’s website www.loanconsolidation.ed.gov.

4. Lender Benefits

   Although lender benefits will probably not outweigh the costs of an alternative student loan consolidation, if you have a good credit score and a lender is offering additional benefits to consolidate with them, you may be able to improve your current situation. Keep in mind that you generally have to make a certain number of on-time payments in order to qualify for the lender benefit, so don’t count your chickens before they hatch.