Paying Your Student Loans: In Plain English

mini graduation cap on US money -- education costs
mini graduation cap on US money -- education costs

One of the most valuable things in life is an education.

It also happens to be one of the priciest things in life.

According to the College Board, the average cost of tuition and fees for the 2013–2014 school year was $30,094 at private colleges, $8,893 for state residents at public colleges, and $22,203 for out-of-state residents attending public universities.

Seeing as most twenty-something’s don’t have that kind of change lying around, student loans are common for young employees. Unfortunately the jargon around these loans is not so reader friendly for even the college elite.

Betsy Mayotte, director of regulatory compliance at American Student Assistance, has been providing free advice and counseling about student aid for 20 years.

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“First of all don’t ignore it, student loans don’t go away and there are no statute of limitations on it,’’ Mayotte said.

Since you are going to owe money no matter what, Mayotte said to do your research to understand your loans.

Think of this as the Spark Notes of financial planning to ensure you pay your loans and get amazing credit scores, without actually having to read the pages of pamphlets and emails from your financial aid office.

The Need to Know Terms

Borrower: The person who applies for, receives and pays the loan. That would be you.

Co-Borrower/Co-Signer: A person who signs a promissory note with the borrower and is equally responsible as the borrower in repaying the debt. For most of us, that would be your parents.

Promissory Note: The binding legal document that states the amount of your student loan, as well as your rights and responsibilities. “I hereby promise too pay for my education for all of eternity.’’

Entrance Interview: Before you get your first student loan, you are required to go through this session that provides information about your loan repayment. You probably didn’t pay much attention, which is why you’re reading this.

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Exit Interview: A session you are required to take before graduating that goes over information about your loan repayments. You definitely did not pay attention to this your spring semester of senior year (because why bring about the gloom of adulthood any sooner then necessary?) and now you are really kicking yourself.

Grace Period: Six months of bliss, and ideally saving, before loan payments kick in.

Amount due: This is the minimum monthly payment you must make by your due date, not your total amount due…but a girl can dream.

Payment Due Date: You went to college so I hope this one doesn’t need explaining.

Effective Date: The date that you can say good-bye to your money because the charge has hit your account.

Interest: A percentage of your loan amount that is charged for borrowing the money, otherwise known as kicking a man while he’s down. Some rates are fixed, meaning the percentage of the loan amount you are charged will always remain the same. Some rates have variable interest, meaning the the rate can change yearly and fluctuate.

Finance Charge: The total interest paid throughout the life of a loan according to your payment schedule. Add this with your loan to find out how much money you really spent to take ballroom dance and start classes at noon.

Loan Fee: Another fee you pay deducted proportionally with each disbursement. And you thought you had nothing more to give.

Gross Income: The salary on your contract, before Uncle Sam takes more than you expected in taxes.

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Adjusted Gross Income: This is how much you earn per year, but it takes into consideration deductions from income, social security taxes, etc. to more accurately reflect the actual money in your pocket. You can find this on your pay stub or your tax form.

Subsidized Loans: These loans are considered financial, need based. While the borrower (you) is at least a half time student or have deferred payments, the government is paying your interest.

Unsubsidized Loans: Your interest starts accruing on day one.

Consolidation: When paying off smaller loans you can combine them with a larger loan and extend your payment period.

Capitalization: This refers to when interest is combined with the principal balance of your loan (the amount you borrowed) at various times. When this occurs depends on when you took your loan out and what type of loan it is, but you can expect outstanding interest to capitalize any time your loan goes from a nonrepayment status (like your grace period) to a repayment status.

Credit Report: A report from the credit bureau that lists your debts, late payments, bankruptcies and all other skeletons in your closet to determine if you are worthy to apply for more loans.

Credit Score: A number in your credit report generally between 300 and 850 that indicates the likelihood of you repaying a loan. Anything above 700? You’re on the ball. Anything below 600? Time to reevaluate your financial game plan.

Types of Loan Programs

Federal Direct Loan Program: Your loan is directly from Uncle Sam.

Federal Family Education Loan Program: Your loan is from Uncle Sam through a lender.

Federal Perkins Loan: These low interest loans that are funded by Uncle Sam, but administered by your school.

Aggregate Loan Limit: There is a limit to the amount of federal loans you can borrow. The annual loan limit depends on the year, the degree you are pursuing, and your status as an independent or dependent student. This determines the total amount you are allowed to borrow over a lifetime. This is misleading because if you borrow your maximum limit but then pay back a portion of that limit, you can then borrow again up to that amount you paid back.

Payment Options

Income Based Repayment: Payments are based on your income and family size—not the amount of your loan. After 25 years of payments, any remaining debt is forgiven.

Pay As You Earn Repayment: The little brother of income based repayment. The payment limit is 10 percent of that income number and debt forgiveness comes in 20 years.

Income Contingent Repayment: Similar to income based repayment, but it a does take into account the amount of your loan when adjusting your payments. The formula is complicated. You start with your adjusted gross income and then subtract an allowance based on the size of your family. The more kids or people financially dependent on you, the more allowance you are given. Payments are maxed at 20 percent of this adjusted, adjusted gross income.

Prepayment, Paid Ahead: This is the amount you pay in excess to your monthly minimum payment that goes toward outstanding fees, outstanding interest, and the principal loan. Overachievers.

You’re In the Red

Delinquency: You missed your payment’s due date. If the payment isn’t made up, your credit history will be hit as well – multiple times depending on how behind you get. Most lenders start reporting at 60 or 90 days past due, but it could be as early as 30 days. You are officially the delinquent your grandmother always thought you to be.

Default: You failed to repay your federal student loan as stated in your promissory note after 270 days of delinquency. Your credit score will take a big hit. You are officially nowhere near the ball.

Deferment: This entitles you to postpone your monthly principal payment. The three most common reasons to defer payment is going back to school at least half time, being unemployed, or going through economic hardship. Be careful with unsubsidized loans because you are responsible for the loan interest that accrues during that time. It will then be added to your loan balance when the deferment period is over. Ouch.

Forbearance: This allows you to temporarily postpone making payments or lower your payments for a specific period of time, but the government will not help you pay any interest that accrues. This is a last-case scenario option. No matter what, the loan interest accrues on all those loans you postpone, and then the balance is higher, so you’ll have higher monthly payments when you start making payments again.

There are plenty of things you can do to avoid getting to a state of delinquency.

“We have seen over the years that the borrowers that have experienced the least stress in the long run have made their first 24 payments on time and they made it a habit to pay it,’’ Mayotte said.

Getting your monthly payments automatically deducted from your account is one great way to guarantee making your payments on time, Mayette said.

Though loans aren’t something fun to talk about or deal with, it’s a reality that is not going away. So the very least borrowers can do is understand their loans and how their payments work. #postgradlyfe #welcometotherealworld

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June 21, 2017 | 5:22 PM