Keeping an Eye on Loan Repayment as Your Child Graduates College

You’ve watched your children grow and mature over the past two decades—from their very first step to their final walk at graduation, as they accept their college diplomas. This is a great time to reflect proudly on their accomplishments. But it’s also time to consider any outstanding loans that were taken out to fund their education.

Exit loan counseling

Before a student borrower graduates from school, he or she is required to participate in an exit counseling session. (This also applies to borrowers who withdraw or drop below half-time attendance.) Today, students may be able to complete exit loan counseling online.

An exit counseling session educates borrowers on such topics as:

How to manage loans after college
Repayment options
Deadlines
Avoiding payment problems
Rights and responsibilities
Deferment

These programs explain borrowers’ rights and emphasize the consequences for defaulting on a loan. Failure to make timely payments, for example, can result in additional late fees, collection costs, ineligibility for future federal student aid, and a lower credit rating for your child. So participation is important to the ongoing financial health of student borrowers.

Repayment options

Most programs offer a grace period before payments are due. The grace period for Federal or Direct Stafford Loans—subsidized or unsubsidized—is six months after graduation, and it’s nine months for Federal Perkins Loans.

For Direct PLUS Loans (Parent Loans), repayment generally begins 60 days after the funds are fully paid out. For Parent Loans disbursed on or after July 1, 2008, however, parents can choose to begin repayment either 60 days after funds are disbursed or six months after the child graduates or ceases to attend school at least half-time.

Lenders normally allow you to select from six repayment programs to fit your budget:

Standard plans charge a fixed rate and usually have a repayment period of up to 10 years.
Extended plans are similar to standard plans, but generally have a repayment period of up to 25 years. This longer-term schedule allows for smaller payments. Keep in mind, however, that this also increases the total amount repaid over the loan’s lifespan.
Graduated plans generally have a repayment term of 12–30 years, depending on the amount borrowed. The payments start small and increase every two years.
Income-sensitive plans calculate the monthly payment as a percentage of the student’s income and can be periodically readjusted with annual documentation. The maximum repayment period is 10 years.
Income-contingent plans consist of monthly payments that are based on the borrower’s income and total debt amount. The payments are adjusted as the individual’s income changes. The maximum repayment period is 25 years.
Income-based repayment plans, effective July 1, 2009, are similar to income-contingent plans, but the monthly payments are based on a lesser percentage of discretionary income.

Not all lenders offer all of these programs, so be sure your child is aware of his or her options. The good news is that repayment plans can be changed during the life of the loan to fit changing situations. Interest paid on student loans may be tax-deductible, so talk to a tax advisor about the current deduction limits.

Deferment and forbearance

Lenders may allow students to defer making loan payments, but they also have strict eligibility requirements for doing so. The most common reasons for deferment include unemployment, school enrollment, and military deployment. It is important to be aware that you may still be held responsible for paying interest on the loan while it is in deferment. And the lender will determine when you need to resume payments.

Young people may also qualify for loan forbearance, which allows them to suspend or reduce payments—typically in one-year installments—for up to three years. When young people have trouble making their loan payments, they should contact the lender to determine if they qualify for deferment or forbearance to avoid damaging their credit or becoming delinquent.

Loans can also be deferred if your child returns to school. Most lenders will automatically defer loan payment if the student is enrolled at least half-time in a qualifying program, such as graduate school.

Consolidation

Most federal education loans have variable interest rates. Consolidating student loans is a great way to lock in a lower—and fixed—rate for the life of the loan. The interest rate is determined by taking the weighted average of the interest rates on the loans being consolidated; it’s currently capped at 8.25 percent. Loan consolidation can lower your monthly payment and eliminate the need to send multiple checks to different lenders each month.

After graduation—and during the loan’s grace period—is a great time to consolidate. You’ll have plenty of time to complete application paperwork, and you’ll also be fully aware of what the new monthly payment will be prior to the first due date. Some consolidation programs offer discounts for paying on time or having the payments automatically deducted from a checking or savings account. Parents can also consolidate any Parent PLUS loans they have taken out.

Determining how and when to begin repaying student loans can be a daunting task. Be sure to take advantage of any resources offered to you and your child through the school or the lender. Contact your financial advisor for more information and strategies to help plan and pay for your child’s education.

Sara Romaine is a financial advisor located at Blue Hills Wealth Management, 300 Crown Colony Drive, Quincy MA 02169. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 617-471-6800 or sara@bluehillswm.com.