Deferment

Deferring your student loans means you’ve postponed payments for a period of time. If you’re still at least a half-time student in school, most lenders will automatically defer your student loan until six months after you’ve graduated or stopped taking classes. Economic hardship and difficulty obtaining employment are other reasons your lender might allow you to defer your loan.

While you loan is in deferment status, interest continues to accrue. You have the option of paying this interest if you can. Note that if you don’t pay interest, it gets added to the balance of your loan after a period of time, usually when the deferment period ends. You could end up owing more on the loan than you originally borrowed.

Forbearance

Loan forbearance is another option to assist you in times of financial difficulty. There are several types of forbearance available.

· Reduced payment allows you to make lower monthly payments on your loan. If the payments aren’t high enough to cover the interest on the loan, it will capitalize periodically. When the interest capitalizes, it’s added to the balance of the loan, making the amount owed higher.

· Extended payment extends the length of your loan making the payments lower. When you extend the length of the loan, you end up paying more in interest over the life of the loan than you would have with a shorter repayment period.

· Temporary postponement of payments is similar to deferment. You’re able to stop making payments for a period of time as agreed by your lender. Interest will continue to accrue during this period of time.

Different lenders have different requirements both for deferment and forbearance. Some require you to fill out forms verifying your financial hardship. Others require you to pay a fee for the convenience.

If you’re having trouble making your payments, it’s best to contact your lender as soon as possible to avoid defaulting on your loan. If you wait, you may forfeit your options for deferment or forbearance.

When you contact your lender, ask what options they have for deferment and forbearance and how you can qualify. Make sure you understand:

· the length the deferment or forbearance period,

· whether or not interest will continue to accrue,

· if you are able to make interest payments,

· whether you will be able to apply for deferment or forbearance in the future, and

· the amount of your payments after the deferment or forbearance has ended.

Each of these pieces of information is crucial to maintaining your financial standing with your lenders.

Student Loan Interest Deduction

If you pay interest on your student loan, this interest may be used to reduce your taxable income by as much as $2,500 (if you paid that much in student loan interest).

Certain conditions must be met for student loan interest paid to be deducted.

· The interest must have been paid on a loan on a loan for the taxpayer, the taxpayer’s spouse, or someone who was the taxpayer’s dependent at the time the loan was taken out.

· The interest must have been paid on a loan that was taken out to pay for tuition and related expenses, like room and board, books, and other necessary fees.

· Interest paid on revolving lines of credit may qualify if the credit was used exclusively for expenses related to higher education.

Only interest paid under those conditions can be used as a tax deduction.

If the loan was taken out from a relative or under a qualified employer plan, interest paid cannot be deducted.

Your lender must send Form 1098-E if you made more than $600 in interest payments on a qualified loan. In most years, the form must be sent out by the end of January. Contact your lender if you meet the requirements but did not receive a form.

You can continue claiming the deduction as long as you have the loan and are legally required to pay interest on it. Once you have repaid the loan or are no longer payment required interest payments, you cannot claim student loan interest deduction.

Income Requirements

While most tax deductions are available to higher income earners, the student loan interest deduction is actually available for lower income earners. In 2006, single filers must have an adjusted gross income of less than $50,000 and married-joint filers should have an adjusted gross income of less than $105,000.

A reduced reduction is available for single filers with an adjusted gross income between $50,000 and $65,000 and for married-joint filers between $105,000 and $135,000.

Single filers with an adjusted gross income greater than $65,000 and married-joint filers more than $135,000 are not eligible for the deduction.

To claim the deduction, income tax filers must use either Form 1040 or 1040A.

IRS Publication 970 (2006) has complete, detailed information on the student loan interest tax deduction.

The reality is, your student loan isn’t contingent upon you graduating from school. You’re responsible for your student loans whether you graduate from school or not. After going nine months without paying payments on your loan, or making deferment or forbearance arrangements, your student loan will go into default.

What’s Student Loan Default?

Default is a way of saying you’ve failed to fulfill your obligation. When referring to a student loan, it means you haven’t made payments or payment arrangements on your loan.

The Consequences

Because of the laws surrounding student loans, it’s almost impossible to get away from student loans.

Here are some facts:

· The chances at getting your student loan discharged in bankruptcy are slim to none. You have to be “totally, permanently disabled”, to even have a chance at removing your liability for the loan

· There’s no statute of limitations on collection of student loans. That means the lenders and their collectors can come after you for the rest of your life or until you repay the loan, whichever happens first.

· Student loan default stays on your credit report for seven years, making it hard to get approved for credit cards, mortgages, auto loans, and even employment.

· You won’t be able to get federal financial aid until you totally repay loan or make arrangements and six consecutive timely payments.

· If you have a professional license, you may not be able to renew it until you’ve rectified the situation.

Your lender may use a collection agency or attorney to collect payment on the loan. In that case, you’re subject to be responsible for the cost of the collector or the attorney, increasing the total amount you owe.

You can be sued and have up to 15% of your take-home wages garnished.

Options After Default

Once you’ve defaulted on your loan, you can certainly continue to attempt to ignore. It will make life difficult to for you, especially while it appears on your credit report.

Or, you can call your lender and attempt to work out a plan. You’ll be surprised to find that many lenders are willing to work with you. Find out what it will take to get caught up and your payment options once you’re back on track. After you’ve made 9 to 10 consecutive, timely payments (not wage garnishments), your loan will be out of default status and the status on your credit report will be removed.

If your loan has recently defaulted and the lender has not filed the default claim, you may be able to stop them from doing so by bringing your delinquency to under 270 days. Consolidating your loans during this period of time is also an option.

Scholarships

A scholarship is usually a merit-based award given by a college or foundation based on some type of criteria. You don’t have to be a star athlete or straight-A student to apply for college scholarship. There are many scholarships rewarded based on community service, test scores, or other criteria.

The good thing about scholarships is that you don’t have to pay them back. Some scholarships are one-time awards while others may be renewed each year. Most scholarships with renewal ability require you to maintain a certain grade point average. Otherwise, you are at risk of losing the scholarship.

Grants

Grants may be awarded by the government or by private organizations and institutions. The major difference between grants and scholarships is that grants are usually given based on need or some other type of affiliation rather than scholastic achievement. (There are some exceptions).

Most grants given by the government are based on financial need. It must be determined that, based on your family income and cost of education, you cannot afford to pay for college.

Since there are a limited number of grants available, not everyone who qualifies will receive a grant.

Military funding

If you, your spouse, or your parents were/are active members of a branch of the military, you may be eligible for military funding for college. Military funding, like scholarships and grants, does not have to be repaid.

Check with your commanding officer, or have your spouse or parent do so, to find out if you are eligible for military funding for your education and how you can use it.

College Fund

Your parents or another relative may have set up a college fund for you when you were younger. A college fund is contributed to over the course of a few years and used when you make the decision to go to college.

The amount in your college fund may or may not cover all your educational expenses. When it’s not enough, you can use another source of funding to make up the difference.

Student loans

Borrowing is one of the final ways you can pay for your college education. The major drawback of student loans versus other kinds of funding is that you have to pay back the loan once you graduate. Many times the benefits of your education greatly outweigh the total cost of the loan, making it a viable way of financing your college education.

Private and Federal Student Loans

The most basic categorization of student loans is federal and private. Federal student loans are provided and backed by the federal government. Some federal student loans are funded by private banks, but even in these cases, the federal government sets the interest rate, fees, and maximum amount borrowed.

Private student loans are provided by private banks. The interest rates on federal student loans are often lower than those of private student loans. Additionally, there is a more stringent approval process for private student loans, often requiring a good credit rating and minimum income level.

Types of Federal Student Loans

Even federal student loans can be further broken categories.

Stafford Loans can be taken out by students to fund their college education based on financial need. There are two types of Stafford loans available – subsidized and unsubsidized.

Subsidized Stafford loans are based on financial need. The government pays interest accrued while the student is enrolled in school.

Unsubsidized Stafford loans are not based on financial need. The student is responsible for making interest payments while enrolled in school. Interest payments can be deferred, but, if this is done, the interest can be added back into the balance of the loan increasing the total amount owed.

PLUS Loans, Parent Loans for Undergraduate Students, are taken out by parents to cover the cost of their children’s education. There is a credit underwriting process for PLUS loans, so it is possible to be denied for the loan, if the parent doesn’t meet the qualifications.

Graduate student are allowed to take out PLUS loans to finance their own education.

Perkins Loans, are given to students who have extreme financial need. Each of the 1,800 participating educational institutions is allotted a certain amount to award in Perkins loans. The financial aid department at each college is responsible for determining who can receive Perkins loans and the amount they can receive. Since there is only a limited amount of funds available, Perkins loans are usually low.

Applying for Student Loans

To apply for federal student loans, you must fill out a Federal Application For Student Aid. If you don’t turn in this form, you will not be eligible for federal student loans, even if you have a financial need.

To apply for private student loans, you will make the application directly to the lender you are interested in borrowing from.

Don’t get too hopeful about having your student loans forgiven. There are only a few specific circumstances in which you can have your loans forgiven.

Volunteering

If you are a volunteer for certain organizations, you may qualify for loan forgiveness.

· When you serve in AmeriCorps for 12 months, you receive $4,725 that can be used toward your student loans.

· Peace Corps volunteers can have their Stafford, Perkins, and consolidation loans deferred and part of their Perkins loans cancelled. For each year of service, 15% of your Perkins loan can be cancelled up to 70% of the total amount of the loan.

· Volunteers In Service to America receive $4,725 for 1700 hours of service.

Teaching

In certain circumstances, students who go on to become full-time teachers can have part of their loans forgiven.

If you become a teacher in an elementary or secondary school with students from low-income families, you can part of your Perkins Loan forgiven for your years of service.

· 15% for year one and year two

· 20% for year three and year four

· 30% for year five

Your school district administration can tell you whether your school is eligible for loan forgiveness under this provision.

Teachers may be eligible for other loan forgiveness programs based on the state in which they teach. You can contact your school district administration to find out if your school is eligible for any type of loan forgiveness.

Legal Professions

Some law schools will forgive your student loans if you take a public service or non-profit position after graduation. You can visit the Equal Justice Works website, www.equaljusticeworks.org, for more information on canceling your law school student loans.

Medical Professions

Certain medical groups offer loan forgiveness if you work in certain medical situations. For example, the National Health Service Corps forgive student loans for registered nurses and physicians who agree to work in areas that are medically underserved.

The criteria for forgiving student loans may differ among the groups forgiving your loan and between federal and private student loans.

If you’d like to ease your payments, but don’t qualify for any forgiveness programs, you may be able to consolidate your student loans. Consolidating your loans allows you to stretch the payments over a longer period of time, lowering your monthly payment.

Approval Method

Most private student loan lenders consider income and credit history to approve you for a student loan. If you have a poor credit history or low income, or both, you will likely be required to have a co-signer. Without a co-signer, you will have to seek other loan options.

Federal student loans can be obtained without credit or income contingencies. You must fill out a FAFSA, Free Application for Federal Student Aid. You can get a copy of the application from the financial aid office at your school or fill it out online at www.fafsa.ed.gov.

Loan Terms

The terms and conditions of the loan will be one of the primary factors you use to choose a student loan lender. Loan terms include things like amount of the loan, interest rate, whether the interest rate can increase and when, grace period, under what conditions you can default, etc. Different lenders offer different terms with the loans they offer.

You should choose the lender with the loan terms that will allow you to have the lowest cost over the life of your loan. If possible look for lenders that offer a fixed interest rate. This way, you don’t have to worry about your interest charge fluctuating from one month to the next.

Repayment Plans

The hardest thing about a student loan is repaying it. No matter what you expect your income to be after you graduate, you’ll never know until you reach that point. It’s best to choose a student loan lender that has a variety of repayment options.

Forbearance And Deferment Options

You may incur financial difficulty at some point in the life of your student loan. Forbearance and deferment options give you the ability to temporarily postpone your student loan payments. It’s good to know that you’ll have one less bill to worry about until you get back on track. Without any forbearance or deferment options you’ll be forced to continue making student loan payments if you have financial hardship. Find out each lender’s options for forbearance and deferment as well as the criteria for qualification.

As you consider student loan lenders, think about each of these factors. Decide which factors are most important to you and look for a lender that offers the best terms in that category.

Types of Student Loans

Student loans can be categorized by who determines the terms and conditions of the loan. Guidelines for some loans are determined by the federal government. These are called federal student loans. Sometimes the funds for federal student loans comes directly from the federal government. Banks can also fund federal student loans. In this case, terms and conditions of the loan are still governed by the federal government.

The second type of student loan is private student loan. These loans, and their associated terms, are provided by private banks.

Applying For Student Loans

To apply for federal student loans, you only need to fill out a FAFSA, or Free Application for Federal Student Aid. The application requests personal identifying information like your name, address, and social security number, along with information about your school attendance for the upcoming school year. You should fill out the type of degree you’ll be obtaining, your grade level, and the type of degree you will be seeking. The application will request financial information for you and your parents to determine the types of aid you are eligible for.

The application process for private loans is less stringent; however, the requirements to get approved for a loan are stricter than with federal student loans. Private student loan lenders check your credit history and income before approving you for a loan.

In both cases, lenders check to make sure you will actually be attending school before giving you the loan.

Student Loan Costs

The cost of a student loan is applied as interest. The lower your interest rate, the lower the cost of your student loan.

It’s important to know that interest begins accruing on your student loan as soon as you receive it. With some federal student loans, the government pays the interest as long as you are in school. With other kinds of student loans, you are responsible for paying student loan interest while you are enrolled in school. There are options for deferring interest payments until after you graduate. If you choose to defer interest payments, the interest will be added to the balance of your loan, increasing the total amount you owe.

Repaying Your Student Loans

After you graduate school, you typically have a six month grace period before payments are due on the loan. Once this grace period has ended, you must begin making regular payments on your student loan to remain in good standing with the lender. It’s wise to call your lender before the end of the grace period to find out the amount of your monthly payment and any repayment options available.

Application Deadline

The FAFSA deadline varies depending on which state you currently reside (not the state in which you’ll be attending school). To get priority consideration for federal student loans, especially those types of loans that are available in limited quantities, you should complete your application as early as possible before the deadline. Note, you can’t submit your FAFSA before January 1 of the school year because the application requires the current year’s tax information.

The Application Process

The FAFSA requests a lot of different kinds of information. Knowing the information required ahead of time will help you prepare for the application.

· Personal identifying information like your name, address, and social security number

· Marital status

· U.S. residency

· Degree and school level expectations for the upcoming school year

· Education level of your parents

· Dependency status

· Parent’s financial information, if you are a dependent student

· Student financial information, regardless of dependent status

· Veteran’s benefits you expect to receive

· The school(s) which you are considering for the next school year

Once your application has been received, it will be sent to your school’s financial aid office. A financial aid officer will review your application and put together a financial aid award package based on the information included in your FAFSA. This aid package will include scholarships, grants, and federal student loans for which you are eligible.

Closing Student Loan Gaps

You can only take out a certain amount in federal student loans each year. If you have accepted the maximum amount in federal student loans and have financial need remaining, you can take out a private student loan.

Private student loans are offered by banks like Sallie Mae and Citibank. They differ from federal student loans in that the banks can set their own terms and conditions of the loan.

The application process for private student loans is different from that of federal student loans. The FAFSA application is not enough for you to get approval for a private student loan. Instead, you must submit a separate application to each lender.

Plan to have your credit and income checked for private student loan approval. If you don’t have a good credit history or meet the income requirements, you may be required to have a co-signer to get approved for the loan. With a good credit history and income, or a co-signer who meets those qualifications, you can get approved for a private student loan.