Tips for Managing your Federal Loan

Got Federal Loans?

So, you’ve graduated, you’ve landed the job (congrats!) and just when you think that all the hard work was over…. now you have to manage your federal student loans! Never fear… to help you navigate the confusion and complexities of the federal student loan process we have compiled a hearty list of items and helpful questions to have ready when you call your loan servicer.

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What to Know Before You Call

A great place to begin is the Department of Education’s National Student Loan Data Syetem. On this site, you can see the types of student loans disbursed for your education. It also shows which company currently services your loans. Be aware the different loan types don’t qualify for all of the same repayment plans or forgiveness programs, so it’s helpful to know which loans you have.

Federal student loans are either Subsidized or Unsubsidized. If your loan is Subsidized, the government offsets the interest when you’re in school or when postponing payments with certain types of deferments. The Unsubsidized loans accrue interest from the date of disbursement, so these loans gather more interest over time.

Questions to ask:

  • How many loans do I have?
  • What type of loans do I have?
  • Are the loans Subsidized or Unsubsidized?

Write all of the answers you gather down somewhere you can reference later in case you can’t remember the exact details of your student loans.

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What are the first questions to ask?

You’ll want to know the basics. Some of this information appears on your Master Promissory Note and monthly billing statements, but your servicer can also answer these questions. If your account is past due, your loan servicer can advise how to bring your account current or if the credit bureaus received delinquent reports.

Questions to ask:

  • How much is my principal balance and interest (also called “accrued interest”)?
  • What is the status of my loans? It will be current, delinquent, or default.
  • If delinquent, how can I bring my account current?
  • What is the length of my repayment term (or how many years it takes to repay)?
  • What is my repayment plan?

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Know the Different Repayment Plans

There are two types of repayment plans for federal student loans: term-based and Income-Driven Repayment (IDR) Plans. Specific information about the different repayment plans and a calculator at Studentaid.gov. Here’s a summary of the plans:

Term-based:

  • Standard: Your loan is repaid in equal monthly installments that are applied to interest and principal.
  • Graduated: The monthly payment stair steps every 24 months. Because your payment is lower in the beginning, it means more interest accrues over the life of the loan. The early payments are applied mostly to interest and the later payments to principal.
  • Extended: Your loan term is extended so repayment happens over a longer time, up to 25 years.
  • Extended Graduated: This combines the Graduated and Extended plans, so the monthly payment stair steps over a longer time.

Income-Driven Repayment (IDR) Plans:

There are four IDR Plans: Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn, and Revised Pay As You Earn. They share the similarity that the monthly payment is calculated using your financial information, like adjusted gross income and household size.

Because your income changes, you must recertify an IDR Plan annually. If you don’t recertify the IDR Plan, then the payment returns to the amount due under the Standard Plan.

The IDR Plans do have a loan forgiveness option. After submitting 20 or 25 years of qualifying payments, the remaining balance of your loans is forgiven. Your loan servicer can tell you the number of qualifying payments received.

Be aware of two issues with IDR Plans. Loan forgiveness under an IDR Plan has a tax liability. More interest can accrue if your payment is lower than the amount due under the Standard Plan.

Questions to ask:

  • What repayment plans are available for my loans, and what are the estimated payment amounts?
  • Is anything required to change my repayment plan?
  • Will additional interest accrue on this repayment plan?
  • Has my IDR Plan been recertified?
  • How many qualifying payments toward forgiveness have I made on an IDR Plan?

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Terms You Should Know

During the call, your loan servicer may mention several options for your loans. The following is a list of terms and the questions to ask.

Administrative Forbearance: The loan servicer postpones payments for up to 60 days when you make changes, like updating the repayment plan. Like a regular forbearance, interest capitalizes, or is added to your principal balance. You can request to remove an administrative forbearance if you submit the payments due during that time.

Questions to ask:

  • How much interest capitalizes?
  • How can I remove the administrative forbearance?

Consolidation: A new loan repays your old loans. Consolidation offers benefits like eligibility for different repayment plans or forgiveness programs. It may offer a lower monthly payment by spreading payments out over a longer time. Remember, not all of your loans have to be included in a consolidation loan. There are downsides to consolidation. More interest can accrue over the life of the loan if your repayment term is longer. When you consolidate, any interest accrued capitalizes so your loan balance increases. If you submitted any qualifying payments prior to consolidation, they do not count toward forgiveness under an IDR Plan.

Questions to ask:

  • How much interest capitalizes?
  • What will my new loan term be if I consolidate?
  • If I consolidate, does it change eligibility for repayment plans?
  • Should I exclude some loans?

Default: Your account reaches 271 days past due. The default status is reported to the credit bureaus along with the past due reports, and it may take years to repair your credit. At 361 days, your servicer transfers your loans for collection activities, including the garnishment of tax returns, paychecks, or Social Security Benefits. Your eligibility for different repayment plans and the postponement of payments becomes limited. Collection costs can be assessed.

Questions to ask:

  • Can my account be brought current?
  • Has my loan been transferred for collection?
  • Can I rehabilitate my loan?

Deferment: You can postpone payments due to qualifying events. Accrued interest can capitalize on some types of deferments.

Question to ask:

  • Am I eligible for a deferment (e.g. enrolled in school half-time or more, military, unemployment, or receiving federal or state public assistance benefits)?

Delinquent: Your account is more than one day past due. At 30 days past due, your loans are eligible to be reported as past due to the credit bureaus.

Questions to ask:

  • How can I bring my account current?
  • Is there a lower repayment plan?
  • Are my loans eligible for a deferment or forbearance?
  • Has delinquent credit reporting occurred?

Forbearance: This postpones payments during financial difficulties. There are limits on the available time, and only 12 months can be used at a time. Interest accrued during forbearance will capitalize.

Questions to ask:

  • How much forbearance time remains on my loans?
  • How much interest capitalizes?
  • When will the forbearance end?

Interest Capitalization: This means the interest is added to your principal balance, which increases the amount owed.

Question to ask:

  • How much interest capitalizes?

Payment Allocation: You can ask to reapply payments, as long as it doesn’t leave your account past due. Your loan servicer can send you a payment history, which shows how payments were applied.

Question to ask:

  • Can I reallocate part of all of a specific payment to Loan Number (fill in the blank)?

Standing Special Instructions:

Your loan servicer can add a standing special instruction so all overpayments go to a particular loan. You can add or remove this at any time.

Question to ask:

  • You can adapt the question to your loans. Consider starting with: Can you apply all overpayments to a specific loan, like the oldest, largest balance, or highest interest rate?

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Final Thoughts

While federal student loans are a complicated subject, your loan servicer is a good resource for any questions about your loans. Sometimes it takes knowing what questions to ask before you can make the best decision for your finances.

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June 3, 2019

Mark Gibson

Mark Gibson is a personal finance consultant and wealth-investor.  Mark brings his top-notch financial analysis to his work at FiGuides as our lead consumer finance editor.

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